Strategy and Industry analysis

What is Strategy?
“to fight and conquer is not supreme excellence . . ;

. . . supreme excellence consists in breaking the enemy’s

resistance without fighting . . . ” Art of War - Sun Tzu Bingfa (350 BC)

“Strategy can be defined as the determination of the basic long-

term goals and objectives of an enterprise, and the adoption of
course of action and the allocation of resources necessary for
carrying out these goals.”
Chandler, 1962,
 What is Strategy?
(Porter, M.E. (1996), “What is Strategy,” Harvard Business Review,
74(12): 61-78.

• Rivals can easily copy your improvement in quality and efficiency. But
they shouldn’t be able to copy your strategic positioning--what
distinguishes your company from all the rest.

• Strategy is the creation of a unique and valuable position, involving a

different set of activities.

• Strategy require you to make trade-offs in competing--to chose what

not to do.

• Strategy involves creating “fit” among a company’s activities.

 Operational Effectiveness
is not Strategy

• What is operational effectiveness?

• Why is it not strategy?

• Why both operational effectiveness and strategy are

important?
 Operational Effectiveness is not
Strategy

• Operational effectiveness means

high Productivity Frontier performing similar activities better
(state of best practice)
Non-price buyer value delivered

than rivals perform them.

• Strategic positioning means

performing different activities from
rivals’ or performing similar
activities in different ways.

• Operational effectiveness and

low strategy are both essential to superior
high low performance, which is the primary
Relative cost position
goal of any enterprise.
 Operational Effectiveness Tools

• Total quality management (360 Degrees)

• Benchmarking
• Outsourcing
• Partnering
• Reengineering
• Change management
 Strategy Rest on Unique Activities

Competitive strategy is about being different.

• What are the sources of differentiation?

• How valuable is the differentiation to the buyer?

• How much of this differentiation is tactical , how much is strategic?

• What is the buyer’s reservation price for this difference?

• How much of this difference is “jnd”

 Sources of Strategic Positions
Art of War

• Variety-based positioning
“a clever combatant imposes his will

on the enemy but does not allow the

• Needs-based positioning enemy’s will to be imposed on him”

• Access-based positioning Create focal points that make

dominant strategies yield maximum
payoffs
 Strategy is about Being Different

• Air Deccan • Jet Airways

– Low Price – Premium Price
– Short / Medium – Short & Long
Routes routes
– No frills – Frills (Jet kids
pack for kids etc..)
Defining the Business

Customer Groups

Customer Needs

Technology

Reference: Abell, 1980

 Variety-based positioning

- Different types of soaps for

different women groups

Beauty Skin
Customer Groups
Working Dove

Non -
Working

Customer Needs

Technology

Reference: Abell, 1980

 Needs-based positioning

Customer Groups

Television screens are

29inch , 25 inch and 14 inch
for different drawing room
dimensions

Technology Customer Needs

Reference: Abell, 1980

 Access-based positioning

Mainframes require
different processing speed
Customer Groups
as compared to a personal
PC

Customer Needs

Technology

Reference: Abell, 1980

 Strategic Management & SWOT

Strengths Drivers Opportunities

& &
Weaknesses Threats

Environment
Environment

External
Internal

STRATEGY

Values Values
of of
Managers Objectives
Shareholders

References: Andrews, 1971; Hofer and Schendel, 1978

 Strategic Management Tasks

Task 1 Task 2 Task 3 Task 4 Task 5

Develop a
Craft a Implement Monitor,
Strategic
Set Strategy and Evaluate,
Vision
Objectives to Achieve Execute and Take
and
Objectives Strategy Corrective
Mission
Action

Revise as Revise as Improve/ Improve/ Recycle

Needed Needed Change Change as Needed
 Redefining the Value Chain
The Traditional Value Chain
Start with Assets, Core Competencies

Assets/ Inputs, Raw Product/ The

Core Material Service Channels Customer
Competencies Offering

The Modern Value Chain

Start with the Customer

Customer Assets/
Channels Offering Inputs, Raw Core
Priorities Material Competencies

(Slywotzky, Morrison, 1997)

 The Modern Value Chain

Truly Understanding the

Customer

Purchase Criteria

Customer Anger(against existing products)

Preferences

Power over decision Inputs,

Customer Assets/ Core
Channels Offering Raw Competencies
Priorities Material
Decision-Making Process

Purchase Occasion

Buyer Behavior

Functional Needs

(Slywotzky, Morrison, 1997)

 Porter’s (1980) Five Forces
Model of Competition
Threat
Threat of New
ofEntrants
New
Entrants

Bargaining Rivalry Among Bargaining

Power of Competing Firms in Power of
Suppliers Industry Buyers

Threat of
Substitute
Products
Intensity of Rivalry Among Existing
Competitors

Cutthroat competition is more likely to occur when:

 Numerous or equally balanced competitors
 Slow growth industry
 High fixed costs
 High storage costs
 Lack of differentiation or switching costs
 Capacity added in large increments
 Diverse competitors
 High strategic stakes
 High exit barriers
Intensity of Rivalry Among Existing
Competitors

High Exit Barriers are economic, strategic and emotional

factors which cause companies to remain in an industry
even when future profitability is questionable.
 Specialized assets
 Fixed cost of exit (e.g., labour agreements)
 Strategic interrelationships

 Emotional barriers
 Government restrictions
 Bargaining Power of Suppliers

Suppliers are likely to be powerful if:

Suppliers exert power in
the industry by:
 Threatening to raise
prices or to reduce quality
Powerful suppliers can
squeeze industry
profitability if firms are
unable to recover cost
increases
 Supplier industry is dominated by a few firms
 Suppliers’ products have few substitutes
 Buyer is not an important customer to
supplier
 Suppliers’ product is an important input to
buyers’ product
 Suppliers’ products are differentiated
 Suppliers’ products have high switching costs
 Supplier poses credible threat of forward
integration
 Threat of New Entrants

Economies of Scale
Barriers to Product Differentiation
Entry
Capital Requirements
Switching Costs
Access to Distribution Channels
Cost Disadvantages Independent
of Scale
Government Policy
Expected Retaliation
 Bargaining Power of Buyers
Buyer groups are likely to be powerful if:
 Buyers are concentrated or purchases are large
relative to seller’s sales

 Purchase accounts for a significant fraction of

supplier’s sales Buyers compete
with the supplying
 Products are undifferentiated industry by:
 Buyers face few switching costs
 Buyers’ industry earns low profits  Bargaining down prices
 Buyer presents a credible threat of backward  Forcing higher quality
integration
 Playing firms off of
 Product unimportant to quality
each other
 Buyer has full information
Threat of Substitute Products

Keys to evaluate substitute products:

Products  Products with improving

with similar price/performance tradeoffs relative to
present industry products
function
limit the
prices firms
can charge For Example:
Electronic security systems in place of security
guards

Fax machines in place of overnight mail delivery

 5 Forces correlation
• Power of forces are mutually exclusive of each other-
(Any collinearity occurring should be excluded for
purposes of calculation)

• Their combined power inverses the power of the

business
Business
power • Their probability of occurrence and power the power
of their impact change over time (By function they are
Power of the hetroscedastic )
Five forces
• They determine the relative bargaining power of the
business and the businesses ability to augment its
market share and or its profitability
 Effects of Entry Barriers and Exit Barriers
on Industry Profits

Exit Barriers
Low High

Low
Low, Stable Returns Low, Risky Returns

Entry
Barriers

High High, Stable Returns High, Risky Returns

 Competitor Analysis

Future Objectives What Drives the competitor?

How do our goals compare to
our competitors’ goals?
Where will emphasis be
placed in the future?

What is the attitude toward

risk?
 Competitor Analysis

What is the competitor doing?

What can the competitor do?
Current Strategy
How are we currently
competing?

Does this strategy support

changes in the competitive
structure?
 Competitor Analysis

What does the competitor believe about

itself and the industry?
Assumptions
Do we assume the future
will be volatile?

What assumptions do our

competitors hold about the
industry and themselves?

Are we assuming stable

competitive conditions?
 Competitor Analysis

What are the competitor’s

capabilities?

Capabilities
What are my competitors’
strengths and weaknesses?

How do our capabilities

compare to our
competitors?
 Competitor Analysis

Future Objectives Response

How do our goals compare to What will our competitors do
our competitors’ goals? in the future?
Where willCurrent
emphasis be Strategy Where do we have a
placed in How
the future?
are we currently competitive advantage?
What is the attitude toward
competing? How will this change our
risk? Assumptions
relationship with our
Does thisDostrategy support
we assume the future competition?
changes in the
will becompetition
volatile?
structure?What assumptions do our
competitors Capabilities
hold about the
industry and themselves?
What are my competitors’
Are we operating under a
strengths and weaknesses?
status quo?
How do our capabilities
compare to our competitors?
End of Deck