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Envisioning Strategy

Business Models Visualized


(created for and by students)

© Sunil Mehrotra
Strategic Management Process
• Envisioning Strategy
– Definition
– Framework
– Visual Models
• External Analysis
– PEST
– PEST Impact Analysis
• Industry Analysis
– Industry Structure
– Evolution of Industries
– Industry Supply Chain
– Potential Industry Earnings
– Porter’s 5 Forces Analysis
– Competitive Intensity
– Strategies for minimizing competitive forces
– Perceptual Map
– Barriers to Entry/Incumbency advantages
– DSIR effect
• Company Internal Analysis
– Value Creating Processes
– Core Competencies
– Growth Strategies
– SWOT Analysis
– Mckinsey 7-S Framework
– Change Management
– Risk Assessment
– Balanced Scorecard
– GE Mckinsey Matrix
Envisioning Strategy: Visual Models
3
2

1
5

4
1. Visualize
2. Think Clearly
3. Communicate Effectively
4. Understand Deeply
5. Share the Vision
6. Act Coherently

www.idiagram.com
Visual Model
A Business Ecosystem
The
The environment
environment

Governments
Governments
Standards
Standards bodies
bodies
New
New entrants
entrants

Competitors
Competitors

Supplier’
Supplier’s suppliers
Supplier’s suppliers Suppliers
Suppliers Organisation
Organisation Customers
Customers Customer’
Customer’s customers
Customer’s customers

Substitutes
Substitutes

Stakeholders
Stakeholders

International
International law
law
New Paradigm Consulting
Visual Model
Comprehensive View
Strategic Management
• Is the process by which an organization
– Establishes its goals and objectives both short
and long-term
– Formulates plans and charts a course of
action for meeting these goals and objectives
in the desired time-frame.
– Implements the actions
– And analyzes progress and results
Strategic Management
• Deals with
– How to grow the business
– How to satisfy customers
– How to compete with rivals
– How to respond to changing environment
– How to manage each functional piece of the business
– How to build organizational capabilities and align
organization to achieve desired goals
– How to achieve strategic and financial objectives
Mission, Vision and Values

• Vision articulates a view of a realistic,


credible, attractive future for the
organization…it is the all-important bridge
from the present to the future of the
organization.
• Mission describes the purpose of the
organization. It represents the present.
• Values reflect the organization’s culture
and norms of corporate behavior.
Goal, Scope and Objectives
• Goal articulates a desired outcome for the
business over a specific time period
• Scope describes the focus of the
business– geography, product lines and
customer segments.
• Objectives are the measurable and
tangible results to be achieved over a
specified time period
Strategic Planning
• Planning is not about predicting the future
• Planning is not about writing a detailed
road map into the future
• Planning is not about a few people writing
a vision statement & then getting ‘buy-in’
from everyone else
Strategic Planning

• Planning is about learning


• Planning is about increasing the
possibilities for the organisation
• Planning is about discovering how fit the
organisation is for its environment
• Planning is about discovering and telling
compelling stories about the future
Strategic Planning Framework
External Factors Internal Factors

Analyzing
Analyzing the firm’s
Analyzing Analyzing Analyzing the firm’s Architecture,
the the the Strengths & Routines &
Environment Industry Competition Weaknesses Culture

Matching Market Opportunities


to firm’s resources and capabilities Firm’s Resources &
Market Opportunities
Capabilities
•What strategic options does the
firm realistically have?
•What is the best strategy for
maximizing Shareholder value?

Shareholder
Returns
Strategic Planning Framework
External Factors Internal Factors

•Direct Competition from Rivals Cost Position in


Market Economics •Bargaining Power of Suppliers Served Market Competitive Advantage
Market
And •Bargaining Power of Customers Benefit Position in Or Disadvantage
Attractiveness
Opportunities •Threat from new entrants Served Market
•Competition from Substitutes
Analyzing
Analyzing the firm’s
Analyzing Analyzing Analyzing the firm’s Architecture,
the the the Strengths & Routines &
Environment Industry Competition Weaknesses Culture

Matching Market Opportunities


to firm’s resources and capabilities Firm’s Resources &
Market Opportunities
Capabilities
•What strategic options does the
firm realistically have?
•What is the best strategy for
maximizing Shareholder value?

•Profit
•Sales Shareholder
•Market Share Returns
•ROI
•Market Value
Strategic Analysis Framework
External Factors Internal Factors

•Week 3 •Week 8
•Week 11
•Week 1 •Week 4 • Week 6 •Week 9
•Week 12
•Week 2 •Week 5 • Week 7 •Week 10

Analyzing
Analyzing the firm’s
Analyzing Analyzing Analyzing the firm’s Architecture,
the the the Strengths & Routines &
Environment Industry Competition Weaknesses Culture

Matching Market Opportunities


to firm’s resources and capabilities Firm’s Resources &
Market Opportunities
Capabilities
•What strategic options does the
firm realistically have?
•What is the best strategy for •Week 13
maximizing Shareholder value? •Week 14

•Profit
•Sales Shareholder
•Market Share Returns
•ROI
•Market Value
Three Tests of Best Strategy
• A good strategy has to be well matched
to Industry and competitive conditions,
market opportunities and threats, and
other aspects of a firm’s external
The Goodness of environment
Future: To here • At the same time, it has to be tailored to
Fit Test
the company’s resource and strengths
and competitive capabilities

•A good strategy leads to sustainable


competitive advantage
The Competitive •The bigger the competitive edge the
Advantage Test strategy helps build the more powerful
and effective it is

•A good strategy boosts company performance


The Performance -Gains in profitability
Test -Gains In competitive strength and long-term
market position

Present : From here

www.studymarketing.org
16

DEFINITION

Strategy (n) – An integrated set of actions


designed to achieve a sustainable
competitive advantage

2
17

PURPOSE OF STRATEGY
• Focus execution efforts
• Always requires good execution

• Make choices
• Investments
• Acquisitions
• People

• Create value
WHAT ARE THE COMPONENTS 18

OF A STRATEGY?
• Mission

• Goals

• Where to compete/grow
– Customers/geographies

• What to offer
– Products/services

• How to win vs competition

• Actions and initiatives required


WHAT MAKES FOR A GOOD 19

STRATEGY?
• Clear and compelling

• Integrated and complete

• Grounded in facts

• Clear short and long term priorities

• Identification of specific actions and resources required


20

AGENDA

• What is strategy?

• What is Lulu’s strategy?

• How do we make it better?


Establish the marketplace for digital
• Mission: content where authors make money
from their written works

By 2011:
over $2B valuation
• Goals: + Gross margin 50%+
#1 in our business

Global unserved and underserved


• Target Markets: profit-motivated book creators,
Licensed/tier-one rights holders

Book creation and publishing tools and services, Social


• Offerings: Network marketing and commerce,
Ebook tools, Marketplace for any content

“Free” business model


Most $ to authors
• Differentiator: Engaged reader-writer community, Open Marketplace
Reader device ubiquity, Global reach

• International expansion 5. Share financial success with those


who create it
• Actions • Social Network integration
(weRead) 6. Make Lulu platform an ecosystem
and initiatives: • 3rd party book marketplace 7. Mobile cart and customer acquisition
• eBook wizard 8. Increase licensed content partnerships
Strategy and Performance:
“There are three kinds of companies— those that make things
happen, those that watch things happen, and those that wonder
what happened.” Anonymous
.
Envisioning Strategy

Business Models Visualized


(created for and by students)

© Sunil Mehrotra
Strategic Management Process
• Envisioning Strategy
– Definition
– Framework
– Visual Models
• External Analysis
– PEST
– PEST Impact Analysis
• Industry Analysis
– Industry Structure
– Evolution of Industries
– Industry Supply Chain
– Potential Industry Earnings
– Porter’s 5 Forces Analysis
– Competitive Intensity
– Strategies for minimizing competitive forces
– Perceptual Map
– Barriers to Entry/Incumbency advantages
– DSIR effect
• Company Internal Analysis
– Value Creating Processes
– Core Competencies
– Growth Strategies
– SWOT Analysis
– Mckinsey 7-S Framework
– Change Management
– Risk Assessment
– Balanced Scorecard
– GE Mckinsey Matrix

© Sunil Mehrotra
PEST Analysis
GDP
Fiscal Policy GDP growth
Monetary Policy Exchange rate
Tax laws Unemployment rate
Intellectual Property protection Skilled labor
ic Education levels
Copyright laws m
Securities Laws Poli
tica ono ge Trade unions

Ec han
Infrastructure
Business climate l Cha Healthcare costs
ng e C Raw materials

Opportunities
Opportunities

Threats
Threats
New technologies i cal
log e So Demographics
Materials technologies
o c
Process technologies
chn ang Ch ial Income Distribution
Information technologies Te ang Social stability
Communication technologies
Ch e Ethnic patterns
Consumerism
Government incentives
Discretionary income
Energy costs
Fashions/fads
Broadband penetration Consumer trends
Technology incubation
© Sunil Mehrotra
It is crucial to describe the subject
for the PEST analysis clearly so
that people, contributing to the
analysis, and those interpreting the
results from PEST analysis, could
PEST Impact Matrix
understand the purpose of the
PEST assessment and its
implications

Impact of Opportunities Threats


Threats Strategic
Nature of
change response
change

Political Change

Economic
Change

Social
Change

Technological
Change

© Sunil Mehrotra
PEST Impact example:

Impact of Opportunities Threats


Threats Strategic
Nature of
change response
change

Political Change

Economic
Change

Social
Change

Technological
Change

© Sunil Mehrotra
PEST Analysis Example:
ic
m
Poli ono ge
tica Ec han
Emerging
Infrastructure
l Ch Markets
ang Technologies C
e

Digital
Connections
Originations

Opportunities
Opportunities

Environmental Demographics
Solutions

i cal So
l og c
o Ch ial
chn ange ang
Te Ch e

© Sunil Mehrotra
PEST Impact example:

Impact of Opportunities Threats


Threats Strategic
Nature of
change response
change

Political Change

Economic
Change

Social
Change

Technological
Change

© Sunil Mehrotra
PEST Impact example:
Demographics

© Sunil Mehrotra
PEST Impact example:

© Sunil Mehrotra
Scenario Planning

http://strategicframing.com/strategic-planning-workshop/
Contemplating the Future
Student Examples: Pest Analysis

Breanne Hayes
April 2008 MBA
Graziadio School of Business and
Management
Pepperdine University

Elizabeth Passeretti
April 2008 MBA Candidate
Graziadio School of Business and
Management
Pepperdine University
PEST Analysis
Impact on J&J
Political Change

– The FDA must approve new products before high


they can be sold in the market, adding to the
costly time-lag within the product pipeline.
Economic
Change
– Demand for many consumer health products is
inelastic as changes in price do not tend to medium
affect sales (consumer health products are
used on a daily basis). In times of economic
uncertainty, however, it is less likely that
consumers will experiment with new product
offerings

Breanne Hayes, April 2008 MBA,


Graziadio School of Business and Management Pepperdine University
PEST Analysis
Social
Change Impact on J&J
– Increased consumer awareness
regarding health issues in recent years
has contributed to increased spending
on health related products. Increased high
health awareness is what will drive
J&J’s expansion into global markets
Technological
Change
– The consumer health industry is high
marked by rapid advances in scientific
knowledge. Product offerings are
subject to constant improvements in
chemistry and industrial technology that
allow scientists and engineers to create
new products and modify existing ones

Breanne Hayes, April 2008 MBA,


Graziadio School of Business and Management Pepperdine University
PEST example:

Impact of Opportunities Threats


Threats Strategic
Nature of
change response
change

Shorten
More
Political Change FDA Longer time Product
approval process conservative to market Development
Cycle

Economic US economic Consumer Generic Evaluate


drugs more acquisitions
Change downturn spending
accepted
down
Identify
Social Caring for
Aging New growth product/market
the elderly
Population opportunities
Change needs to serve
the elderly

New New New


Technological Potential
materials for cost/quality products Invest in
new promising
Change joint frontier competitors start-ups
replacement

© Sunil Mehrotra
Political Change

Biotech firms are highly sensitive to changes in political power. A


Liberal political party will likely reform healthcare so that the Impact
government bears more of the costs. The upcoming elections will
have a significant impact on the industry. In addition, the industry
if highly regulated by government agencies such as the FDA.
High

As most of the costs of drugs are subsidized by third-party payers


(Medicare, Health Insurance), people will continue to purchase
drugs even in an economic downturn. In addition, many of these
Economic

drugs are taken out of necessity, not choice so demand is


Change

inelastic.
However, third-party payers certainly feel the pain of an economic
downturn and may impose cost cutting measures which reduce
Medium
patient reimbursement and put more of an economic burden on
patients. And Biotech firms often depend on single-source
suppliers for raw materials and are therefore sensitive to
increasing costs.
Elizabeth Passeretti April 2008 MBA Candidate
Graziadio School of Business and Management,Pepperdine University
Impact
Change

The aging population greatly increases the patient population


Social

which is beneficial for Biotech firms. The unfortunate reality is High


that more people are suffering from serious illness and need
life saving therapeutics.

As evident by the very name of the industry, Biotech firms are


Technological

highly influenced by advances in technology. Technology can


High
Change

greatly improve the likelihood of discovering new treatments as


well as improving the manufacturing process.

Elizabeth Passeretti April 2008 MBA Candidate


Graziadio School of Business and Management,Pepperdine University
PEST Impact example:

Impact of Opportunities Threats


Threats Strategic
Nature of
change response
change

Operational
Democratic party More
Political Change in power government
Pressure on Efficiency to
prices reduce costs
control

Economic $100+ crude oil Commodity Pressure Focus on


Operational
Change price prices on costs
Efficiency
increasing
Identify
Social Caring for
Aging New growth product/market
the elderly
Population opportunities
Change needs to serve
the elderly
Breakthrough New science New start- Potential Invest
Technological in science. and new ups. new in/acquire
Process technologies Disruptive competitors promising
Change improvement imminent technologies start-ups
technologies

© Sunil Mehrotra
Envisioning Strategy

Business Models Visualized


(created for and by students)

© Sunil Mehrotra
Strategic Management Process
• Envisioning Strategy
– Definition
– Framework
– Visual Models
• External Analysis
– PEST
– PEST Impact Analysis
• Industry Analysis
– Industry Structure
– Evolution of Industries
– Industry Supply Chain
– Potential Industry Earnings
– Porter’s 5 Forces Analysis
– Competitive Intensity
– Strategies for minimizing competitive forces
– Perceptual Map
– Barriers to Entry/Incumbency advantages
– DSIR effect
• Company Internal Analysis
– Value Creating Processes
– Core Competencies
– Growth Strategies
– SWOT Analysis
– Mckinsey 7-S Framework
– Change Management
– Risk Assessment
– Balanced Scorecard
– GE Mckinsey Matrix

© Sunil Mehrotra
Industry Analysis
Understand Deeply

Suppliers

Competitors

Industry Analysis
•Porter’s 5 Forces Analysis
•Competitive Intensity
•Strategies for minimizing
competitive forces
Customers •Incumbency advantages
•Value Chain
•Potential Industry Earnings
•Evolution of Industries
•DSIR effects

© Sunil Mehrotra
Low
Spectrum of Competition High
Competitive Intensity

Perfect Competition
•Many firms
Niche Market •No product differentiation
•Product Differentiation •Price based competition
Oligopoly •Localized competition
•Few Firms Commodities
Clothing Stores
•Strategic Interdependence Gas Stations
•Profitability determined by behavior
Dominant Firm
•Few large firms Automobiles
•More small firms Commercial Aircrafts
•Pricing leadership
Monopoly •Protected Niches
Single Firm
Computer OS
Utilities

Industry Profitability

Adapted from: Saloner, Shepard, & Podolny: Strategic Management, Wiley and Sons, 2001 © Sunil Mehrotra
Industry Evolution: Traditional View
Introduction Growth Maturity Decline

Revenue

Operating
Income

Increasing sales and profits Saturation


Losses Displaced by substitute products
New competitors appear Declining profits
Few competitors Profitability falls
Standardized features
Only a few large scale players survive
Industry shakeout
Oligopoly
•Few Firms
Most industries evolve towards •Strategic Interdependence
•Profitability determined by
behavior of incumbents
© Sunil Mehrotra Adapted from: http://faculty.msb.edu/homak/HomaHelpSite/WebHelp/HomaHelp.htm
The New View:
The Cycle of Industry Creative Destruction

1 Mature/Vertically
Integrated
 Three major phases of industry
evolution

 “Cycle time” of evolution is driven


by the pace and magnitude of
marketplace discontinuities

 Cycle-driving discontinuities
include deregulation, technology,
shifts in consumer preferences,
globalization of markets, etc.
3 2
Recombinant Focused
Market New Entrants
Leaders http://www.manyworlds.com/
The New View:
The Cycle of Industry Creative Destruction

Sales and Direct


Distribution
Superstores Retail

Application Word Wordperfect Others


Software

Operating
System
Windows Apple Linux

Computer
IBM HP Apple Dell

Chips

INTEL AMD

IBM DEC Sperry Wang


Univac

The “mature” The “recombinant”


Computer Industry Computer Industry

Adapted from: Saloner, Shepard, & Podolny: Strategic Management, Wiley and Sons, 2001
Industry Supply/Value Chain
Suppliers

Manufacturers

Distributors

Retailers

Consumers

© Sunil Mehrotra
Student Examples: Supply Chain

Breanne Hayes
April 2008 MBA
Graziadio School of Business and
Management
Pepperdine University

Elizabeth Passeretti
April 2008 MBA
Graziadio School of Business and
Management
Pepperdine University
Overview of Industry Value Chain:
Consumer Health Products
Cotton, Plastics, Chemicals, etc.

Incumbent Firms engage in R&D


NOTE: Incumbent firms
and Mfg to produce
consumer health products compete fiercely for
and OTC pharmaceuticals retailer shelf space!

Market size: $480B


Wholesalers

Retailers:
Pharmacies, Drug Stores, Supermarkets

Consumers
Breanne Hayes, April 2008 MBA,
Graziadio School of Business and Management Pepperdine University
Industry Analysis Legend
Value = Product
Value = Knowledge
Regulators/Gatekeepers
Industry Supply Chain
Raw materials, Lab equipment,
Chemicals

Biotech Companies $52 billion


market
FDA
Physicians
Drug Wholesalers (61%) $67 billion
(Customers) market

Hospitals / Pharmacies (39%)


Payers
(Insurance)
Patients (Consumers)
Elizabeth Passeretti April 2008 MBA Candidate
Graziadio School of Business and Management,Pepperdine University
Supply Chain: Value Added

Profit Value
Added

Value

PRICE
Added

Value
Added

Material
cosls
Manufacturers

Consumers
Distributors
Suppliers

Retailers

© Sunil Mehrotra
Value Added Template

Manufacturers

Consumers
Distributors
Suppliers

Retailers
Value Added

Profitability

Asset
Intensity

ROI

Adapted from: http://faculty.msb.edu/homak/HomaHelpSite/WebHelp/HomaHelp.htm


Potential Industry Earnings (PIE) Analysis

Factors effecting demand:


•Customer habits
•Customer expenditures
•Number of substitutes
•Number of complementary products
•Price reduction by incumbents
Industry Demand
Factors effecting costs
•Cost reductions by suppliers
•Cost reductions by incumbents
•Process improvements
PIE •Technology advances

Opportunity Cost of
Resources

Quantity Produced by the Industry

Adapted from: Saloner, Shepard, & Podolny: Strategic Management, Wiley and Sons, 2001
PIE Analysis
J&J is in a position to capture
Price more potential industry earnings
as a result of increased consumer
demand

Demand shifting outward

Cost to J&J

Quantity

Breanne Hayes, April 2008 MBA,


Graziadio School of Business and Management Pepperdine University
Porter’s 5 Forces Impact on PIE
• Porter’s insight recognizes that the
following characteristics are important to
profitability of the incumbent:
•Intensity of Competition – The intensity of competition
•Availability of Substitutes – The ability of suppliers or buyers of
•Threat of new entrants industry products to restrain industry
•Bargaining power of Buyers profits
– The behavior of firms producing
closely related goods not included in
the industry
Industry Demand – Potential for entry into the market by
new firms

PIE Opportunity Cost of


Resources
•Bargaining Power of
Suppliers

Quantity Produced by the Industry

Adapted from: Saloner, Shepard, & Podolny: Strategic Management, Wiley and Sons, 2001
Porter’s 5 Forces Framework
Concentration of buyers
Economies of scale
Incumbents are fragmented
Product is undifferentiated High initial investments and fixed costs
Switching to another supplier is simple Learning economies
Product is not strategic to the customer Depreciated assets
Customers can produce the product Brand loyalty
themselves
Protected intellectual property
Customer knows the production costs
Customers can integrate back-words Scarcity of qualified resources
Access to raw material controlled by existing players
Distribution channels controlled by existing players
Existing players have close customer relations

Better prices
Better performance
Similar functionality

Few large suppliers


No substitutes
Customers are fragmented Many small players
Switching costs to another supplier are high High cost to exit
Supplier integrating forward Undifferentiated products
Economies of scale Compete on price
Downstream more profitable Low brand loyalty
Low barriers to entry downstream Low switching costs
Slow/no growth market

www.themanager.org
© Sunil Mehrotra
Impact on Profitability
Threat/Power
Industry Industry
A B
High Moderate Low

Competitive
Intensity

Bargaining power
of Suppliers

Bargaining power of
Customers

Threat of New Entrants

Threat from Substitutes

Profits © Sunil Mehrotra


Student Examples:
Porter’s 5 Forces Analysis
Breanne Hayes
April 2008 MBA
Graziadio School of Business and
Management
Pepperdine University

Nicholas Merriam
April 2008 MBA
Graziadio School of Business and
Management
Pepperdine University

Matt Kemp Thomas Weisel Partners


April 2008 MBA
Graziadio School of Business and
Management
Pepperdine University
Porters 5 Forces:

• Coffee Growers
• Pastry makers Consumers
• Coffee machine
makers

• Teas
• Juices
• Regular coffee Nicholas Merriam, April 2008 MBA,
Graziadio School of Business and Management Pepperdine University
Porter’s 5 Forces:
Barriers to entry: Small
firms generally specialize in
R&D and cannot realize
Similarity of manufacturing efficiencies
products enables that large incumbents benefit
easy switching from

MODERATE WEAK

MODERATE
INTENSE

Generic products capture


value from consumers who
are not willing to pay a
premium for brand name
products

INTENSE
Breanne Hayes, April 2008 MBA,
Graziadio School of Business and Management Pepperdine University
Porter’s 5 Forces: Thomas Weisel Partners

Customer’s
Customer’s Power
Power Threat
Threat of
of New
New Entry
Entry
Companies
Companies are are able
able to
to Bulge
Bulge Bracket
Bracket Banks
Banks
choose
choose whowho theythey partner
partner encroaching
encroaching into
into Middle
Middle
with,
with, but
but are
are limited
limited by
by Market
Market
their
their ability
ability to
to run
run aa

MODERATE
business
business and
to
to investors.
and shop
investors.
shop aa deal
deal
High

MODERATE
WEAK
Supplier’s
Supplier’s Power
Power
Investors
Investors have
have power
power toto
choose
choose where they place
where they place
there
there money,
money, but
but don’t
don’t have
have
ability
ability to organize or
to organize or know
know of
of
new
new opportunities.
opportunities.

INTENSE
Competitive
Competitive Intensity
Intensity
Industry
Industry isis highly
highly
competitive
competitive Mathew Kemp, April 2008 MBA,
Graziadio School of Business and Management Pepperdine University
Impact on Profitability
Threat/Power

High Moderate Low

Competitive
Intensity

Bargaining power
of Suppliers

Bargaining power of
Customers

Threat of New Entrants

Threat from Substitutes

Profits © Sunil Mehrotra


Impact on Profitability
Threat/Power

High Moderate Low

Competitive
Intensity

Bargaining power
of Suppliers

Bargaining power of
Customers

Threat of New Entrants

Threat from Substitutes

Profits © Sunil Mehrotra


Strategies for minimizing the power of competitive forces
Reducing the threat of New Entrants
Increasing minimum efficient scales of operations
Creating brand image/loyalty
Protection of intellectual property
Reducing the Bargaining Power of Customers
Alliances with linked products/services
Partnering
Tie up with suppliers
Increase loyalty
Tie up with distributors
Increase incentives and value added
Retaliation tactics
Increase switching costs
Cut out intermediaries
Cut out intermediaries

Reducing threat of substitutes


Increase switching costs
Form alliances
Enter substitute market
Accentuate differences

Reducing the Bargaining Power of Suppliers


Partnering Reducing competitive rivalry within
Supply Chain Management Differentiate your product
Increase mutual dependency Avoid price competition
Build knowledge of supplier costs/methods Reduce industry over capacity
Take-over supplier Focus on different customer segments

Adapted from: www.themanager.org


Porter’s 5 Forces and Generic Strategies
Cost Leadership Differentiation Focus

Rivals cannot meet


Better able to Brand loyalty to
Competitive keep customers focused customer
compete on price
Intensity from switching needs

Bargaining power Better insulated Better able to pass on Better able to pass on
of Suppliers supplier price increases supplier price increases
from suppliers
to customers to customers

Bargaining power Better positioned Fewer alternatives Fewer alternatives


of Customers to offer lower available to switch to available to switch to
prices
Ability to deter
Threat of New new entrants by Customer loyalty can Specialization develops
Entrants unique competencies
offering lower deter new entrants
difficult for new entrants
prices
to match
Can use lower
Customers less willing Customers less willing
Threat from prices to defend to accept substitutes to switch to substitutes
Substitutes against substitutes

Examples:
www.studymarketing.org
Product Differentiation minimizes
competitive intensity
Perceptual Map of Automobile Brands

• Perceptual Maps are a visual


display (usually on two
dimensions) of how brands are
perceived by customers.
• The closer the brands are
positioned in this space the
more competitive they are to
each other.
• Perceptual Maps identify “open
spaces” or unmet customer
needs.
• Perceptual Maps identify salient
attributes of the products on
which consumers differentiate
brands.

Adapted from: http://en.wikipedia.org/wiki/Perceptual_mapping


Perceptual Map of the Beer
Market
Heavy Popular
Full Bodied Heavy with Men
Old Milwaukee

Budweiser
• Beck’s •
Meister Brau Special • Heineken
• Miller • Occasions
Premium
Blue Collar
Good Value • Dining Out
• Coors
Budget Stroh’s Premium
• Michelob
• Coors Popular
Pale Color
Miller
Lite
• Light with

On a
• Women
Old
Budget Milwaukee Light Light Light Less Filling
Adapted from: Prof. Ganesh Iyer, UC Berkeley
Perceptual Map of 2000 Presidential Candidates

Leader

Colin Powell
John McCain

George W. Bush
Religious
Traditional
Bill Bradley Conservative
Liberal
Alan Keyes

Elizabeth Dole
Steve Forbes
Al Gore
Pat Buchanan
Donald Trump
Jesse Jackson

Republican
Opportunistic
Democrat
Source: 12Americans.com, 2000
www.populus.com
Independent
Student Examples:
Perceptual Mapping

Nina Tooley
April 2008 MBA
Graziadio School of Business and
Management
Pepperdine University
Perceptual Map Example:
Contemporary

Zara

Discount Expensive

Classic

Nina Tooley, April 2008 MBA,


Graziadio School of Business and Management Pepperdine University
Perceptual Map Example:
Contemporary

Zara

Young Mature

Classic
Nina Tooley, April 2008 MBA,
Graziadio School of Business and Management Pepperdine University
Barriers to Entry/
Incumbency Advantage
• Economies of Scale
• Cumulative Investments
• Learning economies
• Innovation advantage
• Promotional advantage
• Customer loyalty
advantage
• Switching costs advantage
• Demand Side increasing
returns advantage

© Sunil Mehrotra
Adapted from: Saloner, Shepard, & Podolny: Strategic Management, Wiley and Sons, 2001
Economies of scale occur when increased output leads to lower unit costs (lower average costs)

Wal-Mart can sell products more cheaply because its huge buying power gives it economies of scale.
Demand Side Increasing Returns
Network Effect
Network Effects occur when the benefits of a
product increase to each user as the number of
users increases. An example of network effects is
telephone service. The more people who use them
the more valuable they are to each user. The Web
is an example with even more rapidly increasing
DSIR than telephones or fax machines.

Industries with Demand Side Increasing Returns


have the characteristics of “winner takes all”. Many
of the Web based industry exhibit this
characteristic, example: eBay and more recently
the social networking sites such as Facebook.

Source: www.wikipedia.com
Positive Feedback loop creates
“winner takes all”
Base of users

Installed base grows


Attracts new users

Gets a larger share


of new purchases
Strategic Management Process
• Envisioning Strategy
– Definition
– Framework
– Visual Models
• External Analysis
– PEST
– PEST Impact Analysis
• Industry Analysis
– Industry Structure
– Evolution of Industries
– Industry Supply Chain
– Potential Industry Earnings
– Porter’s 5 Forces Analysis
– Competitive Intensity
– Strategies for minimizing competitive forces
– Perceptual Map
– Barriers to Entry/Incumbency advantages
– DSIR effect
• Company Internal Analysis
– Value Creating Processes
– Core Competencies
– Growth Strategies
– SWOT Analysis
– Mckinsey 7-S Framework
– Change Management
– Risk Assessment
– Balanced Scorecard
– GE Mckinsey Matrix

© Sunil Mehrotra
Value Creation Processes

Manufacturers

Consumers
Distributors
Suppliers

Retailers
Key Operational
Issues

Adapted from: http://faculty.msb.edu/homak/HomaHelpSite/WebHelp/HomaHelp.htm


Activity Based View of
Value Creation Process

Infrastructure

Support Human Resources it


r of in
Activities P rg
a
Technology Development M

Procurement

Primary Inbound Outbound


Marketing
Service
Operations and
Activities Logistics Logistics
Sales P
M rofit
ar
gin

Sequence of Activities
Student Examples:
Value Disciplines/Value Creation Processes

Nicholas Merriam
April 2008 MBA
Graziadio School of Business and
Management
Pepperdine University

Alana Turoff
April 2008 MBA Candidate
Graziadio School of Business and
Management
Pepperdine University
Alana Turoff, April 2008 MBA,
Graziadio School of Business and Management Pepperdine University
Starbuck’s Value Chain
Firm - Legal - Organizational Form
Infrastructure - Financial Policy
- Accounting - Incentive Systems
- Barista
Human Resource - Superior Rewards
Training
Management

Technology
- New
Espresso
- Better Espresso
Machines
M
Development Machines - New Clover Method
A
- Only the
Procurement best 3% of
R
coffee
G
- Buying Coffee - Roasting
Coffee
- Maintaining
Stores
- Desirable store
settings (3rd Place) I
- Other
- Operating - CPG’s in - Excellent N
Purchasing Customer Service
Stores retailers

- Limited Advertising

Inbound Operations Outbound Marketing


Logistics Logistics And Sales
Nicholas Merriam, April 2008 MBA, Graziadio School of Business and Management Pepperdine University
Activities aligned to build unique
Core Competencies
Infrastructure
Human Resources it
rof in
P rg
Technology Development a
M
Procurement Product
Leadership
Marketing
Inbound Outbound
Operations and ServiceP
Logistics Logistics
Sales M rofit Infrastructure
ar
gin
Human Resources it
rof in
P rg
Technology Development a
M
Sequence of Activities Operational
Effectiveness
Marketing
Inbound Outbound
Operations and ServiceP
Logistics Logistics
Infrastructure Sales M rofit
ar
gin
Human Resources it
rof in
P rg
Technology Development a
M
Customer
Intimacy
Marketing
Inbound Outbound
Operations and ServiceP
Logistics Logistics
Sales M rofit
ar
gin
Strategic Options and the Plays
Plays:
•Product Leadership
•Customer Intimacy
•Operational Effectiveness
•Change the rules of the game
Market Orientation

Micro Macro

Innovate
Basis of Competition
Product
Conform Leadership

Customer Operational
Intimacy Effectiveness

Options:
•Niche or Mass?
•Conform or Innovate?

http://faculty.msb.edu/homak/HomaHelpSite/WebHelp/HomaHelp.htm
Core value drivers

Process Orientation Operational


Customer Effectiveness
Intimacy
Value “Dominate the
Relationship
Network Eco-System”
“Work Backwards Owner
Architect
from the Customer”

Core Value Drivers Degree of Core Value Drivers


1. Customer Differentiation 1. Network positioning
Through Processes
relationships 2. Process leadership
2. Demand chain mgmt 3. Optimizing efficiency
3. Optimizing scope

Product
Core Value Drivers
Innovator 1. Product development
2. Branding
3. Distribution channels
Product
Leadership “Creative
Destruction”
Adapted from: http://www.manyworlds.com/
Example business model paths over time

and sometimes
or here . . .
move here . . .

Value
Relationship
Network
Owner
Architect

2000 1985

2000

1996 Product
Innovator
1962

businesses 1990
start here . . . http://www.manyworlds.com/
Copyright ManyWorlds, Inc. 1998 - 2008.
Lessons from Retail
Amazon versus WalMart round 1 . . .

Process Orientation
Value
Relationship
Network
Owner
Architect

Degree of
Core Value Drivers Core Value Drivers
1.
2.
Customer relationships
Demand chain mgmt
Stalemate!
differentiation
through process
1.
2.
Network positioning
Process leadership
3. Optimizing scope 3. Optimizing efficiency

Product
Innovator

http://www.manyworlds.com/
Copyright ManyWorlds, Inc. 1998 - 2008.
Strategies for Growing a Business

•Product Development
•Customer Penetration
•Market Development
•Diversification

http://faculty.msb.edu/homak/HomaHelpSite/WebHelp/HomaHelp.htm
Strategy Analysis Framework
Root conditions Measurable indicators or Explanation
causes for profitability

External Factors
•Direct Competition from Rivals
The Market Economics •Bargaining Power of Suppliers
Market
And •Bargaining Power of Customers
Market Attractiveness
Opportunities •Threat from new entrants
•Competition from Substitutes

Firm’s Strategy for Creating Matching firm’s resources and capabilities


Economic Value to market opportunities Shareholder
Returns

Internal Factors
Cost Position in
Firm’s Resources
The Firm and Served Market Competitive Advantage
And
Its position Benefit Position in Or Disadvantage
Capabilities
In the Market Served Market

Adapted from: http://faculty.msb.edu/homak/HomaHelpSite/WebHelp/HomaHelp.htm


Visual Model
Think Clearly

External
Understand Deeply
Environment

Communicate Effectively

Industry Structure

Suppliers,
Customers, and
Competitors

Company

Goals, Objectives,
and Action Plans
© Sunil Mehrotra
Strategic Management Process
• Envisioning Strategy
– Definition
– Framework
– Visual Models
• External Analysis
– PEST
– PEST Impact Analysis
• Industry Analysis
– Industry Structure
– Evolution of Industries
– Industry Supply Chain
– Potential Industry Earnings
– Porter’s 5 Forces Analysis
– Competitive Intensity
– Strategies for minimizing competitive forces
– Perceptual Map
– Barriers to Entry/Incumbency advantages
– DSIR effect
• Company Internal Analysis
– Value Creating Processes
– Core Competencies
– Growth Strategies
– SWOT Analysis
– Mckinsey 7-S Framework
– Change Management
– Risk Assessment
– Balanced Scorecard
– GE Mckinsey Matrix

© Sunil Mehrotra
Matching Resources and Capabilities to
Market Opportunities

Alana Turoff, April 2008 MBA, Graziadio School of Business and Management Pepperdine University
Four Steps to an Actionable SWOT Analysis
Step4:
Step1: Step2: Step3:
Turning SWOT
Establishing the Creating the Leveraging
outcomes into
SWOT team SWOT framework strategy framework
actionable results
Internal Issues

Internal Team/ Internal Factors Product life cycle


Financial situation
Internal Issues Brand perceptions
Executive Management Competencies and skills Mckinsey 7-S Framework
Product Management Client relationship
Marketing Supplier relationships
Leadership and culture
Learning economies
Price and performance

Balanced Scorecard
Internal Team/
External Issues
External Issues

Sales Management External Factors PEST analysis


Supply Chain Management Economic conditions
Market maturity
Technology adoption
Customer buying patterns Porter’s 5 Forces
Competitive situation analysis
External stakeholders Regulatory environment
Clients
Partners
Industry analysts
Key Questions for Internal and External Issues
STRENGTHS WEAKNESSES OPPORTUNITIES THREATS

FINANCIAL financial strengths financial weaknesses financial financial threats


opportunities

CUSTOMER customer strengths customer weaknesses customer customer


opportunities threats

INTERNAL PROCESSES internal strengths internal weaknesses internal internal threats


opportunities

1
PEOPLE people strengths people weaknesses people opportunities people threats

"BSC SWOT." Wikipedia, The Free Encyclopedia. 22 Mar 2008, 02:33 UTC. Wikimedia Foundation, Inc.
23 Apr 2008 <http://en.wikipedia.org/w/index.php?title=BSC_SWOT&oldid=199981480>.
Sustainable Competitive Advantage
Types of Positional Advantage
Brand name
Customer relationships
Government protections
Status
Distribution channels
Geographic incumbency
Installed base and de facto standards
Gatekeeper in the flow of goods and
services

Types of Capabilities Advantage


Manufacturing
Engineering
Product development
Customer service
R&D
M&A
Sourcing
Organization
Culture Adapted from: Saloner, Shepard, & Podolny: Strategic Management, Wiley and Sons, 2001
Aligning Organization, Systems and Processes
to Goals and Strategy
to create sustainable Competitive Advantage

Structure: The basic organization of the


Mckinsey 7-S Framework company, its departments, reporting lines,
areas of expertise, and responsibility (and
how they inter-relate

Systems: Formal and informal procedures


that govern everyday activity, covering
everything from management information
systems, through to the systems at the point
of contact with the customer (retail systems,
call centre systems, online systems, etc).

Strategy: The direction and


• scope of the company over the
long term.

Shared values: The values and beliefs of


the company. Ultimately they guide
employees towards 'valued' behavior.

Skills: The capabilities and competencies


that exist within the company. What it
does best.
Style: The leadership approach of top
management and the company's
overall operating approach.

Staff: The company's people resources and


how they are developed, trained, and
motivated.

Adapted from:
www.buildingbrands.com/didyouknow/14_7s_mckinsey
Strategic Management Process
• Envisioning Strategy
– Definition
– Framework
– Visual Models
• External Analysis
– PEST
– PEST Impact Analysis
• Industry Analysis
– Industry Structure
– Evolution of Industries
– Industry Supply Chain
– Potential Industry Earnings
– Porter’s 5 Forces Analysis
– Competitive Intensity
– Strategies for minimizing competitive forces
– Perceptual Map
– Barriers to Entry/Incumbency advantages
– DSIR effect
• Company Internal Analysis
– Value Creating Processes
– Core Competencies
– Growth Strategies
– SWOT Analysis
– Mckinsey 7-S Framework
– Change Management
– Risk Assessment
– Balanced Scorecard
– GE Mckinsey Matrix

© Sunil Mehrotra
Translating Strategy into Action
Strategic Map
• A strategy map provides a visual framework for a firm’s
strategy.
• Strategy map links together:
1. The desired productivity and growth outcomes
2. The customer value proposition
3. Internal process for creating value
4. The capabilities required from intangible assets

Simplified Strategic Map

Financial perspective Long term shareholder value Long-term value

Productivity Growth

Customer perspective Customer Customer Value Proposition

Regulatory
Operations Customer Product
Internal perspective & Value-creating processes
Management Management Innovations
Social

Learning & growing perspective Human Information Organizational


Intangible assets
Capital Capital Capital

Adapted from and www.summaries.com


Strategy Map Template

Long-term shareholder Value

Productivity Strategy Growth Strategy

Improve Cost Improve Asset Expand Revenue Enhance Customer


Financial perspective Structure Utilization Opportunities Value

Customer Value Proposition


Product / Service Attributes Relationship Image
Customer perspective
Price Quality Availability Selection Functionality Service Partnership Brand

Operations Customer Innovation Regulatory & Social


Internal perspective
Management Process Management Process Process Processes
•Identify opportunity
•Supply •Selection •Environment
•R&D portfolio
•Production •Acquisition •Safety and Health
•Design/Develop
•Distribution •Retention •Community
•Deploy
•Risk management •Growth

Learning & growing Intangible Assets


perspective
Human Capital Information Capital Organizational Capital

•Employee skills •Infrastructure •Culture


•Employee talent •Network •Leadership
•Know-how •Databases •Alignment
•Information •Information systems •Teamwork

Adapted from and www.summaries.com


Student Example
Translating Strategy to Action
Balanced Scorecard Approach
From Strategy to Plans to Budgets
The Process
Drilling down on the process
Translating Strategy into Action
“50,000’ view”

“Ground Level”
Change Management
External Factors Internal Factors

•PEST changes •Need to improve productivity

•Response to: •Grow the business


Forces of Change
-Competition •Change culture

-New entrants •Merger or acquisition

-Substitutes
-Suppliers
Eight steps to making change stick
SET THE STAGE
1. Create a Sense of Urgency.
Help others see the need for change and the importance of acting immediately.
2. Pull Together the Guiding Team.
Make sure there is a powerful group guiding the change—one with leadership skills, bias for action, credibility,
communications ability, authority, analytical skills.
DECIDE WHAT TO DO
3. Develop the Change Vision and Strategy.
Clarify how the future will be different from the past, and how you can make that future a reality.
MAKE IT HAPPEN
4. Communicate for Understanding and Buy-in.
Make sure as many others as possible understand and accept the vision and the strategy.
5. Empower Others to Act.
Remove as many barriers as possible so that those who want to make the vision a reality can do so.
6. Produce Short-Term Wins.
Create some visible, unambiguous successes as soon as possible.
7. Don’t Let Up.
Press harder and faster after the first successes. Be relentless with instituting change after change until the
vision becomes a reality.
MAKE IT STICK
8. Create a New Culture.
Hold on to the new ways of behaving, and make sure they succeed, until they become a part of the very
culture of the group.

Source: John Kotter, HBS


Eight Steps…continued
Stage Actions Needed Pitfalls
Eight Steps…continued
Stage Actions Needed Pitfalls
Eight reasons for failure
1. Allowing too much complexity
2. Failing to build a substantial coalition
3. Failing to understand the need for clear vision
4. Failure to clearly communicate that vision
5. Permitting roadblocks against that vision
6. Not planning for short-term results and not
realizing them
7. Declaring victory too soon
8. Failure to anchor changes in corporate culture

Source: John Kotter, HBS


o rs
Strategy Analysis Framework
c t
l Fa
a
te rn Root conditions Measurable indicators or Explanation
Ex causes for profitability

•Direct Competition from Rivals


The Market Economics •Bargaining Power of Suppliers
Market
And •Bargaining Power of Customers
Market Attractiveness
Opportunities •Threat from new entrants
•Competition from Substitutes

Firm’s Strategy for Creating Matching firm’s resources and capabilities


Economic Value to market opportunities Shareholder
Returns

Internal Factors
Cost Position in
Firm’s Resources
The Firm and Served Market Competitive Advantage
And
Its position Benefit Position in Or Disadvantage
Capabilities
In the Market Served Market

In
te
r na
lF
ac Adapted from: http://faculty.msb.edu/homak/HomaHelpSite/WebHelp/HomaHelp.htm
to
rs
o rs
Strategy Analysis Framework
c t
l Fa
a
te rn Root conditions Measurable indicators or Explanation
Ex causes for profitability

•Direct Competition from Rivals


The Market Economics •Bargaining Power of Suppliers
Market
And •Bargaining Power of Customers
Market Attractiveness
Opportunities •Threat from new entrants
•Competition from Substitutes

Firm’s Strategy for Creating Matching firm’s resources and capabilities


Economic Value to market opportunities Shareholder
Returns

Internal Factors
Cost Position in
Firm’s Resources
The Firm and Served Market Competitive Advantage
And
Its position Benefit Position in Or Disadvantage
Capabilities
In the Market Served Market

In
te
r na
lF
ac Adapted from: http://faculty.msb.edu/homak/HomaHelpSite/WebHelp/HomaHelp.htm
to
rs
Framework for Corporate Strategy
in a multi-unit business
• The focus thus far has been on Strategic
Management in a single business.
• A general manager in a multi-business
enterprise such as GE, Citi, or Hewlett-Packard
has the additional challenge of adding value by
extracting synergies across business units.
• Synergy implies that the “whole” is greater than
just the sum of the parts--the portfolio of
business units under a corporate umbrella would
do better than as stand alone businesses.
Framework for Corporate Strategy
in a multi-business unit
• Corporate managers add value in two
primary ways:
1. Allocating Resources
2. Managing Intangible Assets:
– Human Capital
– Information Capital
– Organization Capital
GE-Mckinsey Portfolio Matrix
for allocating resources
Business Strength
Market Attractiveness

Protect Invest to Build


Position Build Selectively

Build Manage for Limited expansion/


Selectively Earnings Harvest

Protect Manage for


Divest
Refocus Earnings

Resource Allocation Strategies


Adding Value by managing
Intangible Assets
•Shared values/culture
•Diffusing best practices
•Imposing standardization
•Skills development
•Information systems
•Management development