Business Strategy

Cambridge University Entrepreneurs

2 November 2000

A great idea for a new business needs to be supported with a sound strategy
A great idea
Strategic analysis Understanding the impact of the economic and competitive environment on the future of your proposition

Strategic choice Identifying and choosing between the possible strategic options open to you Implementing the strategy Identifying how you will make it happen and exactly what youll do

Strategic analysis is about understanding how changes in the wider environment affect your business proposition

What is going on in the market

PEST analysis a checklist for assessing the drivers within the business environment in which you will operate Porters five forces model a model to characterise the competition your business will encounter

How well placed are you to exploit the opportunities and counter the threats

SWOT analysis a framework for matching organisational strengths and weaknesses to opportunities and threats

PEST is a simple checklist for analysing the drivers within your business environment
Political/legal Regulation Tax regime Environmental green issues Employment laws Government stability and legislative agenda Economic Business cycles Economic trends inflation, money supply Unemployment/labour supply Disposable incomes Energy availability and cost

This is a quick checklist to prompt thinking about the environmental factors relevant to your business there may well be others Dont try to be comprehensive concentrate on the top few factors that will have the greatest impact on your business Look for the long-term drivers of change (for example, globalisation, technical shifts, potential shortages of key resources ) Identify any factors that may pose an opportunity for you but not your competitors this could be an essential source of competitive advantage Remember that the outcome of doing a PEST analysis is a sound understanding of the opportunities and threats your business will face

Social Population/demographics Income distributions Lifestyle expectations/ consumerism Education levels Social mobility

Technological Government spending on research Innovations Focus of technology effort Speed of technology transfer

Porters model looks at how the immediate competitive environment shapes business strategy

Competitive markets are shaped by the threat of new entrants or substitute products/services, and the relative power of suppliers and customers There is likely to be intense rivalry between different players attempting to compete in the same marketplace
Suppliers

Potential new entrants

Industry rivalry Buyers

Substitutes

Michael Porters Five Forces model (1980)

Buyers and suppliers can place constraints on your business and limit margins

Suppliers have market power when:

your choice of alternative suppliers is limited switching costs the economics of changing supplier are high

Individual customers can exert influence over your business when:

they buy a large proportion of your output (can demand bulk discounts, special invoicing terms ) they have several other potential sources of supply to choose from (for example, commodity products) and seek to squeeze their suppliers your product/service forms a large part of their cost-base they will shop around for the best deal

their product/service has a high-profile brand (for example, Intel Inside)

your business is not that important to them demand for their product is high and they could easily sell elsewhere

Strong suppliers might pose a threat of forward integration if you are unwilling to meet their price demands

Customers might pose a threat of backward integration if your prices are too high

Your share of the market can be eroded by competition

The ability of new players to enter the market depends on the existence of barriers to entry put up by incumbents

Direct substitution

mobile phones displace pagers CDs replaced records.and in turn may themselves be supplanted

economies of scale capital requirements needed

access to distribution channels (for example, pubs, cinema )

experience of operating in the market likely retaliatory behaviour government legislation or regulation Differentiation/innovation (builds brand and image)

Indirect substitution (competition for consumer spend)

new car or a holiday? doing without (for example, giving up drinking, smoking )

Alternative products and services can render your offerings unattractive or even obsolete

One tactic to resist substitution is to build in switching costs, which make it uneconomic to change to the new product; another is to build customer loyalty to your product by offering incentives to keep buying

A SWOT analysis matches environmental opportunities and threats with organisational strengths and weaknesses

Analyse the environmental opportunities and threats first (for example, using PEST) Also consider the customer need which you will fulfil Define organisational strengths and weaknesses in terms of exploiting these opportunities and defending against the threats Measure strengths and weaknesses relative to those of your competitors there are not absolute measures Try to get objective independent assessments of strengths and weaknesses those of managers or founders in the firm are inevitably distorted and subjective Focus on the top few issues dont let too much detail cloud the message Avoid looking too much at the past focus on the competitive position now and in the future

Areas to think about in looking at organisational strengths and weaknesses include:

marketing alliances access to financial resources production technology distribution workforce organisational structure clarity of strategy !

Strategic choice is about deciding your high level approach to ensure success and in which parts of the market you will play

What is your key competitive advantage

Generic strategies for market entry

Off all the activities involved in delivering a service or product to a customer which will you be involved in

Value chain models

If you are selling more that one product or service are you developing a balanced portfolio

Portfolio analysis

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One critical choice is the way in which your business will create competitive advantage over your rivals

Three fundamental generic strategies:

Differentiation requires some unique element of service/product for which the customer is willing to pay a premium price (for example, high performance cars, designer clothes ) Focus business concentrates on serving the precise needs of a very narrow, welldefined market segment (for example, Coca-Cola) classic strategy of new start-ups

Competitive scope

Cost leadership business sets out to be the lowest cost producer in the industry maybe through technology). Emphasis is on achieving economies of scale/absolute cost advantage over competitors (for example, voice telephony services, steel manufacture )

Source of competitive advantage Low cost Industry-wide Differentiation

Cost leadership

Differentiation

Segments

Focus

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It is vital to understand the value chain for your industry and where you plan to fit in

Person-to-person mobile services

End user

Terminal

Access Terminal provision

End user

Mobile ecommerce expands the value chain

Security services

Payment Goods and processing services

Content packaging

Access provision

Terminal

End user

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It is also worth considering the role different players may be taking within the value chain
Access provision Goods and services Security services

Content packaging

Payment processing

Mobile operators
Content providers

Financial institutions
Other merchants Internet portals Mobile portal startups Virtual ISPs

Eqpt manufacturers
Core business Increasing involvement Potential involvement No involvement

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Portfolio analysis helps assess the balance of activities (business units or product streams) across the company
High Business growth rate (%)

Problem children

Stars

Dogs

Cash cows

Low Low Market share (relative to competitors) High

The Boston Consulting Group (BCG) matrix

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The BCG matrix is a visual display showing the expected balance between cash users and cash generators

Stars have high market shares in a growing market. Company may be spending heavily to win this share but is hopefully gaining valuable experience (reducing costs) faster than competitors Cash cows have high market shares in a mature (slow growth) stable market. High market share should mean unit costs lower than those of competitors

BCG matrix has the advantages of simplicity and clarity, but there are caveats:

markets (and hence market share) may be difficult to define

its a static analysis its worth thinking where individual products/business may migrate over time
designation as a cash cow can stifle innovation and revitalisation

Dogs have low share in static or even declining markets. They may be a drain on resources as the company struggles to keep them going Problem children are products or businesses in a growing market but with low market share. They represent risky investments heavy cash investments to grow market share may not be matched with operational costs reductions

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Case study Manchester United PLC

Current revenue streams

Gate receipts Merchandising Television rights

Sponsorship
Catering/events

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Manchester United PLC revenue breakdown

CAGR 97-00 8% 16%

33%

-9%

12%

Source: Manchester United PLC Annual Report 1997 and 2000

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Case study Manchester United PLC Breakout group activities

Prepare a succinct statement of what you think Manchester Uniteds product is For each current area of the business consider external opportunities and threats

Conduct a portfolio analysis of the different areas of the business (guess relative market share)
Devise a simple strategy to grow each area of the business

Consider radical strategies the company could adopt to significantly enhance revenue growth in the coming years

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