BSDT Notes PDF

1. What is strategy Strategy: It’s defined as the long-term direction of an organization, formed by choices and actions about its resources and scope, to create advantageous positions relative to changing environments and stakeholders' context. Long-term. Strategies are measured over time and the i...

1. What is strategy Strategy: It’s defined as the long-term direction of an organization, formed by choices and actions about its resources and scope, to create advantageous positions relative to changing environments and stakeholders' context. Long-term. Strategies are measured over time and the importance is emphasized by the three-horizons framework: 1. Horizon 1: businesses are the current core of activities. In the long term, they will be flat or declining in terms of profits. 2. Horizon 2: businesses are emerging activities that should provide new sources of profit 3. Horizon 3: Create viable strategic options for the future. Higher-risk activities that may take years to generate profit Direction. Managers try to set the direction of their strategy according to long-term objectives. Organizations. Strategy concerns an organization’s external boundaries (what to include within the organization) and how to manage relationships with outside. Tactics are the activities that take place to achieve the strategy. Strategy is the plan to achieve a desired future state Strategic decisions ∙ Are about: o The long-term direction of an organization o Scope of an organization's activities o Gaining advantage o Addressing changes in the business environment o Building on resources and capabilities o Values and expectations of stakeholders ∙ They are likely to be: o Complex in nature o Made in a situation of uncertainty o Affect operational decisions o Require an integrated approach o Involve change 1.2 Purpose of Strategy To define and express the purpose of an organization to stakeholders Stakeholders: individuals that depend on an organization to fulfill their own goals and whom, in turn, the organization depends. There are four ways in which organizations define their purpose: Mission statement: Provides employees and stakeholders with clarity about what the organization is fundamentally there to do (what business are we in? what would be lost if the organization did not exist? How do we make a difference?) Vision statements: concerned with the future the organization seeks to create and achieve (what do we want to achieve? If we were here in twenty years, what would we want to have achieved?) Statement of corporate values: communicate the underlying and enduring core principle that guides an organization's strategy and define the way the organization should operate (these values do not change with circumstances, otherwise they are both not core and enduring) Statement of objectives: statements of specific outcomes that are to be achieved (stated in financial terms, market-based objectives, competitive advantage, and triple bottom-line objectives – economic, environmental, and social) 1.3 Strategy statements Definition: Summary of the organization's strategy. Should have three main themes: 1. The fundamental goal that the organization seeks (mission, vision, or objectives), 2. The scope or domain of the organization’s activities, and 3. The advantages or capabilities it must deliver. ∙ Scope: An organization's scope refers to three dimensions: Customers Geographical location The extent of internal activities. ∙ Advantages: how the organization will achieve the objectives it has set for itself in its chosen domain (competitive advantage) 1.4 Levels of strategy There are three levels of strategy: 1. Corporate level: concerned with the overall scope of an organization and how value is added to the constituent business units (how resources are allocated and how original are diversified into others) 2. Business-level: how individual businesses should compete in their markets (called a competitive strategy) 3. Functional strategies: how an organization's components effectively deliver the corporate and business levels strategies in terms of resources, processes, and people. 1.5 Exploring strategy 1. Strategic position: concerned with the impact of strategy (macro-environment, the industry, the organization’s strategic capabilities (resources and competencies), the stakeholders, and the culture). 2. Strategic choices: involves the option for strategy in terms of both the directions in which one might move and the methods by which one might pursue (business strategy and models, corporate strategy and diversification, international strategy, entrepreneurship and innovation, mergers and acquisitions and alliances) 3. Strategy in action: how the strategies are formed and how they are implemented (strategy performance and evaluation, strategy development process, organizing, leadership and strategic change, strategy practice) 1.6 Who works with strategy? All managers are concerned with strategy: Top managers: formulate and control strategy but may also involve others in the process Middle and lower-level managers: must meet strategic objectives and deal with constraints All managers: must communicate strategy to their teams and can contribute to the formation of strategy through ideas and feedback Organizations can also use strategy specialists: ∙ Large organizations have strategic planning or analyst roles ∙ Strategy consultants can also be used by consulting firms ∙ Specialist strategy consulting firms 1.7 Strategy in different contexts Strategy can be applied in many contexts where the issue from one differs: ∙ Small business (strategic purpose, growth issues, retaining independence) Multinational corporations (geographical scope, cultural and structure issues) Family businesses (family concerns, strategic change, and leadership) Public sector organizations (service/quality and managing change issues) Not-for-profit organizations (purpose and funding issues) 2. Introduction to digital transformation Power: computational, storage, and communications. There is an exponential increase in performance and an exponential decrease in costs. Suppliers' point of view: supercomputing, smarter world, hyper-connectivity, cloud computing, and cyber security. Digitization: conversion of analog to digital Digitalization: use of digital technologies and digitized data to impact how work gets done, transform how customers and companies engaged and interact, and create new (digital) revenue streams  3. Macro-Environment Analysis 3.1 Introduction Macro-Environment: consists of broad environmental factors that impact to a greater or lesser extent many organizations, industries, and sectors. Important aspects of strategic analysis: 1. Organization’s purpose: Mission, Vision, Values, and Objectives 2. Opportunities: Look externally to the market, market demands, and competitive offerings 3. Capabilities: Look internally (assets and resources) Organization strategic position: How to analyze an organization's position in the external environment – both macro environment and industry sector. How to analyze the determinants of superior performance – resources, capabilities, and the linkage between them Layers of the business environment: 1. The organization 2. Competitors and markets 3. Industry (or sector) 4. The macro-environment How to analyze the macro-environment: 1. Pestel Analysis (market and non-market) 2. Forecasting (megatrends, inflexion points, and weak signals) 3. Scenario analysis 3.2 Pestel Analysis Pestel analysis, being part of the external analysis, highlights six environmental factors in particular: 1. political 2. economic 3. social 4. technological 5. ecological 6. legal. It helps to provide a list of potentially important issues that could be influencing strategy. Organizations need to consider: Market environment: Suppliers, customers, and competitors (interactions are primarily economic, compete for resources and profits) Non-market environment: Interactions with non-governmental organizations, politicians, government departments, political activists, campaign groups, and the media (build reputation and connections) Environmental Factors: 1. 1. Political: Highlights a. The role of the (customer, owner, supplier, or regulator of business) b. Exposure to civil society organizations that are liable to raise political issues (campaign groups, social or traditional media, and political lobbyists): i. Government policies ii. Taxation Rates iii. Foreign trade regulations iv. Political risk in foreign markets v. Changes in trade blocs vi. Political analysis: 1. macro-micro dimension which refers to the risks associated with whole countries, and 2. internal-external dimension which related to factors originating within the countries 2. Economic Factors: a. Economic cycles (good growth rates may be followed by lower or negative growth rates in the following years) b. Interest rates c. Personal disposable income d. Exchange rates e. Unemployment rates f. Differential growth rates around the world 3. b. Some industries are vulnerable to economic cycles: a. Discretionary spending industries: sectors where consumer spending is considered non-essential or optional (cars, housing). These industries rely on consumer spending which can be affected by changes in the economy, and therefore when there are downturns consumers are less likely to make non-essential purchases b. High-fixed-cost industries: sectors where costs are fixed and do not vary with production or sales (airlines, hotels). These costs must be paid regardless of the level of demand and sometimes need investments. So, when demand decreases or there are economic downturns, there may be financial difficulties in covering the costs. 4. 3. Social Factors: a. Demographics b. Wealth distribution (influence relative sizes of markets) c. Geography (markets can be concentrated locations) d. Culture (changing cultural attitudes can lead to strategic challenges) 5. Social networks have implications for innovativeness, power, and effectiveness. These networks are called organizational fields (communities of organizations that interact more frequently with one another than with those outside the field – regulators, media, and campaign groups. 6. 4. Technological Factors: : new technologies can open new opportunities and challenges. a. i. Discoveries and technological developments (developments on the internet, nanotechnology, or the rise of new composite materials) b. b. We need to identify areas of potential innovative activity. The indicators are: i. Research and development budgets (spending on research) ii. Patenting activity iii. Citation analysis iv. New products announcements v. Media coverage 7. Ecological Factors: a. Refers to ‘green’ or environmental issues, such as pollution, waste, and climate change (environmental protection regulations, energy problems, global warming, waste disposal, and recycling)  b. Ecological challenges: i. i. Direct pollution obligations: minimizing the production of pollutants, cleaning up and disposing of waste ii. ii. Product stewardship: managing ecological issues throughout the organization’s entire value chain and the whole lifecycle of the firm’s products. iii. iii. Sustainable development: whether the product or service can be produced indefinitely into the future 8. 6. Legal Factors: a. Labour, environmental, and consumer regulations b. Taxation and reporting requirements c. Rules on Ownership d. Competition and corporate governance Key drivers for change: Environmental factors have a high impact on industries and sectors, and the success or failure of strategies within them. They vary by industry or market. How to use the Pestel framework: 1. Apply selectivity by identifying specific factors which impact the industry, market, and organization in question, 2. Identify factors that are currently important but consider which will become more important in the next years, 3. Use data to support the points and analyze trends, and 4. Identify opportunities and threats. 3.3 Forecasting Forecasting takes three fundamental approaches to the future based on verifying degrees of uncertainty: 1. Single-point forecasting (where organizations have such confidence about the future that they will provide just one forecast number), 2. Range forecasting (organizations have less certainty, suggesting a range of possible outcomes), and 3. Alternative futures forecasting (involves less certainty, focusing on a set of possible yet distinct and discontinuous futures, they happen or do not) Directions of change: Megatrends: large-scales changes are slow to form, but influence many areas of activity, possible over decades (aging population or global warming) Inflexion points: when trends shift sharply upwards or downwards Weak signals: advanced signs of future trends that are particularly helpful in identifying inflexion points. 3.4 Scenarios analysis Scenarios offer plausible alternative views of how the macro-environment might develop in the future, typically in the long term. These alternative scenarios can be constructed around key drivers. 4. Industry and sectoral analysis Industry: a group of firms producing products and services that are essentially the same. Market: a group of customers for specific products or services that are essentially the same (e.g., a particular geographical market) Sector: a broad industry group (or group of markets) especially in the public sector Key topics to define the industry: 1. Industry analysis 2. Industry types and dynamics 3. Competitor groups and segments 4.2 Industry analysis The first step is to define the industry. If defined incorrectly there is a risk that significant strategy aspects are overlooked. There are three aspects that managers need to consider: 1. The industry must not be defined too broadly (too wide to be meaningful) or too narrowly (thus excluding important competitors) 2. The broader industry value chain needs to be considered (different industries often operate different parts of a value chain and should be analyzed separately) 3. Industries can be analyzed at different levels (different geographies, markets, and products or services) The competitive forces: Porter’s Five Forces Framework helps to identify the attractiveness of an industry in terms of five competitive forces: 1. Competitive rivalry: a. Competitor concentration and balance (industries with numerous or equally powerful competitors may lead to intense rivalry) b. Industry growth rate (low growth or decline in an industry can lead to price competition and low profitability) c. High fixed costs d. High exit e. Low differentiation (can lead to competition on price) 2. The threat of entry: a. economies of scale (where large-scale production gives companies a cost advantage over new entrants), experience curve effects (where incumbents have an advantage because are more efficient due to experience curve effects), and network effects (buyers value being in a network of many customers), b. access to supply or distribution channels (incumbents may have control over supply and distribution channels through vertical integration or supplier loyalty) c. capital requirements (the high financial level needed to enter) d. legislation or government action (legal constraints such as patents or regulations) e. expected retaliation (if organizations believe that the retaliation of existing firms will be too great to allow entry. 3. The threat of substitutes: a. Extra-industry effects (the threat of substitutes coming from outside the industry and not within. The switching cost of the substitute determines the levels of threat and the higher it is the less attractive the industry is) b. The price/performance ratio (vital to determine the level of threat as an expensive substitute product can still be effective if it offers a performance advantage that customers value) 4. The power of buyers: a. concentrated buyers (few large customers account for most of the sales buyer power is increased)  b. low switching costs (buyer power increases when they can easily switch from one supplier to another. Buyers have a strong negotiation position and can squeeze the supplier), c. buyer competition threat (when the buyers have the capability to supply themselves or through backward vertical integration) d. low buyer profits and impact on quality (when buyers profits are low, and the quality of the products are not significantly affected by the purchased product) 5. The power of suppliers: a. concentrated suppliers (where few producers dominate supply, suppliers have more power over buyers) b. high switching costs (if it is expensive to move from one supplier to another, then the buyer becomes dependent and weak) c. supplier competition threat (supplier have more power where they are able to enter the industry themselves or cut out buyers who are acting as intermediaries) d. differentiated products (when the products or services are highly differentiated, suppliers will be more powerful) Complementors: an organization is your complementor if it enhances the business attractiveness to customers or suppliers. Network effects: when one customer of a product or service has a positive effect on the value of that product for other customers (in other words, the more customer use the product, the better for everyone in the customer network) The implication of the competitive five forces: Which industries to enter (or leave): used to identify the relative attractiveness of industries by evaluating the strength of the five forces. Industries are attractive when the forces are weak, and managers should invest in industries where the forces work in their favor and avoid markets where the forces are strong. How can the five forces be managed? Managers should identify strategic positions where the organization best can defend itself against strong competitive forces and try to influence and exploit weak forces.  How are competitors affected differently? Not all competitors are affected equally by changes in industry structure. Strategic group analysis helps to understand how competitors will be affected. For example, large firms with more resources can often deal with barriers to entry. Issues in five force analysis: Defining the right industry: Applying the five forces framework at the most appropriate level is important for accurate analysis. A bad definition can lead to an inaccurate reflection of the five forces (analyzing the low-cost airline instead of the global airline) Converging industries: In high-tech arenas, industries often overlap and converge. It can make it difficult to define the industry boundaries and accurately assess the competitive forces (mobile phones, cameras, and mp3 are converging making it harder to define the industry) Complementary industry: The five forces framework does not consider the impact of complementary industries, which can enhance the attractiveness of a business to customers and suppliers (windows and McAfee can work together to improve the overall value) Steps in an industry analysis: 1. Define the industry clearly 2. Identify the actors of each of the five forces and define different groups within them and the basis for this, 3. Determine the underlying factors of and total strength of each force 4. Assess the overall industry structure and attractiveness 5. Assess recent and expected future changes for each force 6. Determine how to position the business in relation to the five forces. 4.3 Industry types and dynamics Industry types: Monopoly: An industry with just one firm with a unique product or service and therefore no competitive rivalry. It has great power over buyers and suppliers. Very high barriers to entry. It has a dominant position in the market. The competitive forces threat is very low. Oligopoly: an industry dominated by a few large firms, with limited rivalry and the threat of entrants and great power over buyers and suppliers. There are few competitors, product and service differences vary, and high entry barriers. Perfect competition: where barriers to entry are low, there are countless equal rivals with  close identical products and services, and information about prices, products, and competitors is perfectly available. Low entry barriers and the competitive forces threats are very high. Hypercompetitive industries: where the frequency, boldness, and aggression of competitor interactions accelerate to create a condition of constant disequilibrium and change. Industry life cycle: 1. Development stage (few players, low rivalry, highly differentiated products, weak five forces) 2. High growth (low rivalry, a high number of market opportunities, weak buyers, low barriers to entry, growth ability is key) 3. Shake-out stage (variable profits, increased rivalry, weak competitors exit the business, managerial and financial strength are key) 4. Maturity stage (barriers to entry increase, low growth and standard products, stronger buyers, market share and cost key) 5. Decline stage (extreme rivalry, many and high exit barriers, price competition, cost and commitment key) Comparative industry structure analysis Provides a framework for summarizing the power of each of the five forces on five axes. Power diminishes as the axes go outward. Where the forces are low, the total area enclosed by the lines is large; where the forces are high, the total area is small. The larger the enclosed area the greater the profit potential. The industry at time 0 has low rivalry and faces low substitution threats. The threat of entry is moderated, but both power and supplier powers are relatively high. It is a moderately attractive industry to invest in. The area enclosed by the green area is large, suggesting a relatively attractive industry.  4.4 Competitors and markets Market segment: a group of customers who have similar needs that are different from customer needs in other parts of the market. Where these customer groups are relatively small, such markets are called niches, which can be valuable. Segmentation should reflect an organization’s strategy and strategies based on market segments and must keep customer needs in mind. Not all segments are attractive or viable market opportunities – evaluation is essential: Variation in customer needs: focusing on customer needs that are highly distinctive from those typical in the market is one means of building a long-term segment strategy. Customer needs vary. Specialization: this can be important for a successful niche strategy. Experience and relationships are likely to protect a dominant position in a particular market segment (+ experience = lower costs and + relationships). Specialized industries can have difficulties in competing on a broader industry basis, since customers value different things. Bases of market segmentation: 1. Characteristics of people/organizations 2. Purchase/use situation 3. Users' needs and preferences for product characteristics Critical success factors: factors that are either particularly valued by customers or which provide a significant advantage in terms of cost. An important source of competitive advantage or disadvantage. Different industries and markets will have different critical success factors. Blue oceans: new market spaces where competition is minimized. It is useful for identifying potential spaces in the environment with little competition, they are strategic gaps in the marketplace. Important principles: focus and diverge. Blue ocean thinking encourages entrepreneurs and managers to be different by finding or creating market spaces that are not currently being served. Red Oceans: industries that are already well defined and rivalry is intense. Strategy canvas: compares competitors according to their performance on key success factors to establish the extent of differentiation. It captures current factors of competition in the industry and offers ways of challenging them and identifying new competitive offerings. Conclusion: Blue Ocean strategies are means of avoiding Red Oceans with many similar rivals and low profitability and can be analyzed with a strategy canvas. Opportunities and threats: the critical issue in undertaking environmental analysis is the implication that is drawn from this understanding in guiding strategic decisions and choices. Identifying opportunities and threats are extremely valuable when thinking about strategic choices. They are one-half of the SWOT analysis that shapes many companies' strategy formulation. The goal is to reduce identified threats and take advantage of the best opportunities. Techniques to identify them: 1. PESTEL analysis, 2. Identification of key drivers (help generate different scenarios), 3. Porter’s five forces analysis (identify rise or fall in barriers to entry or opportunities to reduce the industry rivalry), and 4. Blue Ocean (might reveal where companies can create new market spaces). 5. Resources and capabilities Resource-based view: a theory that asserts that the competitive advantage and superior performance of an organization are explained by the distinctiveness of its resources and capabilities. Resources and capabilities: contribute to the long-term survival of an organization and potentially to competitive advantage: Resources are the assets that the organization has or can call upon, “what we have” Capabilities are the way those assets are used or deployed, “what we do” A distinction needs to be made between resources and capabilities that are at a threshold level. Threshold resources and capabilities are those needed for an organization to meet the necessary requirements to compete at all in each market and achieve parity with competitors in that market. Distinctive resources and capabilities are required to achieve a competitive advantage (distinctiveness or uniqueness that is of value to customers and which competitors find hard to imitate, which is distinctive resources, or it can be distinctive capabilities, ways of doing things that are unique to that organization and used to be valuable to customers) 5.2 Strategic capabilities and competitive advantage There are four key criteria by which resources and capabilities can be assessed in terms of  providing a basis for achieving competitive advantage: VRIO – Value, Rarity, Inimitability, and Organizational support. A VRIO analysis thus helps to evaluate if, how and to what extent an organization or company has resources and capabilities that are: Valuable Rare Inimitable Supported by the organization. V: resources and capabilities are valuable when they create a product or service that is of value to customers and enables the organization to respond to environmental opportunities or threats. There are three components: ○ (1) Value to customers, ○ (2) taking advantage of opportunities and neutralizing threats, and ○ (3) cost (the product or service needs to be provided at a cost that still allows making the returns). R: rare resources and capabilities are those possessed uniquely by one organization or by a few others. Competitive advantage is longer-lasting, but rarity does not endure forever, so it’s important to consider other bases of sustainability in competitive advantage. I: inimitable resources and capabilities are those that competitors find difficult and costly to imitate or obtain or substitute. ○ Competitive advantage can be built on unique resources, but these may not always be sustainable if the competitors can imitate them. ○ The sustainable advantage is more often found in competencies (the way resources are managed, developed, and deployed) and the way competencies are linked together and integrated. O: The organization must be suitably organized to support the valuable, rare, and inimitable capabilities that it has including appropriate processes and systems. It implies taking full advantage of the resources and capabilities. Value chain: describes the categories of activities within an organization that, together, create a product or a service. Managers need to understand which activities are important to create value. We have primary activities, concerned with the creation or delivery of a product or service and support activities, which help to improve the effectiveness of primary activities. Competitive advantage can be analyzed in any of these activities: Primary activities: Inbound logistics: concerned with receiving, storing, and distributing inputs to the  product or service including materials, stock control, transport Operations: transform the inputs into the final product or service (machining, packaging, assembly, testing) Outbound logistics: collect, store, and distribute the product or service to the customer (warehousing, materials handling, distribution) Marketing and sales: provide the means whereby customers are made aware of the product or service and can purchase it (sales administration, advertising, and selling) Service: includes activities that enhance or maintain the value of a product or service (installation, repair, training, and spares) Support activities: Procurement: processes that occur for acquiring the various resources inputs to the primary activities. Technology development: All value activities have a technology Human resource management: It transcends all primary activities and is concerned with recruiting, managing, training, developing, and rewarding people. Infrastructure: formal systems of planning, finance, quality control, information management, and the structure of an organization. Usage of the value chain: A generic description of activities – understanding how the discrete activities (or clusters of linked activities) contribute to consumer benefit. Identifying activities where the organization has strengths or weaknesses ∙ Analyzing the competitive position of the organization using VRIO criteria – thus identifying sources of sustainable competitive advantage Looking for ways to enhance value or decrease cost in value activities (outsourcing) Value system: it comprises the set of inter-organizational links and relationships that are necessary to create a product or service. Uses of the value system: The make or buy decision: which activities to do “in-house” and which to outsource or decide which activities should be part of the internal value chain because they are central to achieving competitive advantage. Understanding cost/price structures across the value system: analyzing the best area of focus and the best business model Identifying profit pools: it refers to the different levels of profit available at different parts of the value system Partnering: decide whom to work with and the nature of these relationships Benchmarking: used as a means of understanding how an organization compares with others (typically competitors). There are two approaches to benchmarking: 1. 1. Industry/sector benchmarking: comparing performance against other organizations in the same industry/sector on a set of performance indicators 2. 2. Best-in-class benchmarking: comparing an organization’s performance or capabilities against best-in-class performance, from whichever industry and therefore seeks to overcome some of the above limitations. SWOT: provide a general summary of the Strengths and Weaknesses (internal analysis) explored in an analysis of resources and capabilities, and the Opportunities and Threats (external analysis) explored in an analysis of the environment. Uses of SWOT analysis: Major strengths and weaknesses, and opportunities and threats are identified using the analytical tools explained previously Scoring (-5 to +5) can be used to assess the interrelationships between the environmental impacts and the strengths and weaknesses to examine strengths Listing: This can generate a very long list of strengths, weaknesses, opportunities, and threats, being clear about what is important and what is not. Rules to prioritize: ○ (1) focus on strengths and weaknesses that differ in relative terms compared to competitors or comparable organizations and leave out areas where the organization is at par with others, ○ (2) focus on opportunities and threats that are directly relevant to the specific organization and industry and leave out general and broad factors, and ○ (3) summarize the results and draw conclusions 5.3 Dynamic capabilities Dynamic capabilities: These are how an organization's ability to renew or recreate its resources and capabilities to meet the needs of changing environments. Such capabilities are different from ordinary capabilities. These are the resources and capabilities that are necessary for efficient operations, and that allow companies to be successful and earn a living now by producing and selling a similar product or service to similar customers but are not likely to provide long-term survival, performance, and competitive advantage in the future. There are three generic dynamic capabilities: Sensing: constantly scanning and exploring new opportunities across various markets and technologies (R&D and market research) Seizing: once an opportunity is sensed it must be seized and addressed through new  products or services, processes, and activities Reconfiguring: Seizing an opportunity may require renewal and reconfiguration of organizational capabilities and investments in new technologies, manufacturing, and markets. Developing strategic capabilities: Internal capability development: ○ Building and recombing capabilities: creating new capabilities that provide for competitive advantage (requires entrepreneurship and intrapreneurship skills) ○ Leveraging capabilities: identifying capabilities and resources in one area of the organization with are not presented in other business units, and transferring them to other parts ○ Stretching capabilities: see opportunities to build new products or services out of existing capabilities External capability development ○ Ceasing activities: non-core activities can be stopped, outsourced, or reduced in costs ○ Monitor outputs and benefits: to better understand sources of consumer benefits and enhance anything that contributes to this ○ Awareness development: recognizing what enhances strategy (training, development, and organization learning) 6. Competitive strategies and business models The focus is on two fundamental strategic choices: business strategy and business models. Business strategy: choices about business positioning relative to competitors (how organizations relate to competitors in terms of their competitive business strategies) Business strategy themes: 1. Generic competitive strategies (cost leadership, differentiation, focus, and hybrid strategies), 2. Business models (value creation, value configuration, and value capture) 6.2 Generic competitive strategies Competitive strategy: concerned with how a company, business unit, or organization achieves competitive advantage in its domain of activity (issues such as costs, product, service, branding, and features) Competitive advantage: how a company, business unit, or organization creates values for its users both greater than the costs of supplying them and superior to that of rivals. Features: 1. To be competitive, customers must see the sufficient value that they are prepared to pay more than the cost of supply 2. To have an advantage, organizations must be able to create value greater than their competitors. Three generic strategies: Cost-leadership strategy: it involves becoming the systematically lowest-cost organization in a domain of activity. ○ ∙ Key cost drivers: Lower inputs costs: Companies may seek competitive advantage by locating their labor-intensive operations in countries with low labor costs Economies of scale: it refers to how increasing scales reduces average costs of operation over a particular time period. They also occur when fixed costs are spread over high levels of inputs and can also come from purchasing discounts for large quantities of inputs. There can also be diseconomies of scale, where large output levels lead to increased costs due to factors such as overtime pay or neglect of equipment maintenance Experience: a key source of cost efficiency, as the experience curve suggests that the more experience an organization has in a particular activity, the more efficient it becomes at it. The experience curve implies that unit costs decrease as an organization's cumulative experience with each unit of output increases. Product/process design: product and process design can greatly impact costs. Engineers can use cheaper, standard components and companies can use web based methods to interact with customers to lower costs. ○ It's important to know that low cost should not be pursued with total disregard for quality. There are two options: Parity: allows the cost-leader to charge the same prices as the average competitor in the marketplace while translating its cost advantage wholly into extra profit Proximity: closure to competitors in terms of features. Where a  competitor is sufficiently close to competitors in terms of products or services, a customer may only require small cuts in prices to compensate for the slightly lower quality making higher profits Differentiation strategy: involves uniqueness along some dimensions that are sufficiently valued by customers to allow a price premium. Within each market, businesses may differentiate along different dimensions (store sizes, locations in retail or safety, style in cars) Key issues to consider: ○ The strategic customer on whose needs the differentiation is based ○ Key competitors, who are the rivals and who may become rival ∙ Key drivers: ○ Products and services attribute: certain product attributes can provide better or unique features than comparable products or services for the customers ○ Customer relationships: differentiation can rely on the relationship between the organization providing the product and the customer. It relates to how the product is perceived by the customer. The perceived value can increase through: Customer services and responsiveness Customization Marketing and reputation ○ Complements: differentiation can be built on linkages to other products or services. The perceived value can be greater when products are complemented by other products. Focus strategy: it targets a narrow segment or domain of activity and tailors its products or services to the needs of that specific segment to the exclusion of others. It specializes in its target segment rather than focusing on others. Types: Cost-focus strategy: it identifies areas where broader cost-based strategies fail because of the added costs of trying to satisfy a wide range of needs Differentiation focusers: it looks for specific needs that broader differentiators do not serve so well. Focus on one need helps to build specialist knowledge and technology, increases commitment to service, and can improve brand recognition and customer loyalty. There is a fundamental trade-off between cost leadership and differentiation strategy and thus firms need to adopt and stick to one single generic strategy. Failure to do this leads to doing no strategy well or being “stuck in the middle”. However, there are hybrid strategies that combine different generic strategies under certain circumstances: Organizational separation: it is possible for a company to create separate strategic business units, each perusing different generic strategies and with different cost  structures (the challenge is to prevent negative spillovers from one strategic business unit to another. Technological or managerial innovation: innovations allow radical improvements in both cost and quality. Competitive failures: if rivals are similarly stuck in the middle or if there is no significant competition then middle strategies may work 6.3 Interactive strategies Business strategy choices depend on what competitors do: they are interactive. It refers to the way a business chooses and adjusts its strategy in response to the strategies of its competitors (important in highly competitive markets). For example, if all organizations are using a cost-leadership strategy then we can use a differentiation strategy. How to respond to the entry of a low-cost rival: (1) threat assessment (whether is substantial or not; the high cost organization should not respond to a low-price competitor), (2) differentiation purpose (if there are consumers prepared to pay for them, the high-cost organization can seek out new points of differentiation), and (3) cost response (merger with other high-cost organizations may help to reduce costs and match prices through economies of scale) 6.4 Business models Business model: it describes a value proposition for customers and other participants, an arrangement of activities that produces this value, and associated revenue and cost structures (concerns the mechanisms of an organization’s value creation, configuration, and capture). New entrants with new business models can radically change the dynamics and competition in a market and establish superior positions. Components of business models: Value-creation: a key part of a business model that describes what is offered and how value is thus created for the various parts involved: customers, partners, and others (the main concern is how the needs of target customer segments are fulfilled but also create value for the others) Value-configuration: it explains how various interdependent resources and activities in the value chain underlie the value proposition (technology, equipment, facilities). These factors are part of a system that explains what activities create value and how they are linked, and what participants perform them Value-capture: it describes the cost structure of resources and activities and the revenue  stream from customers and others. It also shows how the value created will be apportioned between the organization and stakeholders. For a company, it also describes how profit is made while for not-for-profit and the public sector, there are no expectations of financial gain. Points to be emphasized: Business models are often taken for granted. As business models mature and become standardized, they are rarely questioned. Business models thus often become institutionalized and part of an industry´s recipe. While competitors may share business models their business strategies can still differ. For example, Airbnb has differentiation advantages based on its size and network effects even though others use the same model. Business model patterns: companies used them competitively. There are three typical patterns: 1. Razor and blade: primary focus is on the value capture component, which makes it more of a revenue model. Based on selling a primary product at a low price and then making profits from the sales of complementary products (sell a razor and then replacement blades) 2. Freemium: a model where a basic version of a product is offered for free, with the aim of building a large customer base and convincing a portion of those customers to pay for premium services (revenue comes from premium customers that attract even more) 3. Peer-to-peer: model that brings people and/or businesses together without the need for a middleman. It’s based on cooperation among individuals aided by an app, website, or other online services, and can include a wide range of transactions (education, personal items, providing loans. Ex: uber and Airbnb) Business model canvas: Key partners (suppliers, strategic alliances, partners, cooperation), key activities (core competencies to sustain business models), key resources (physical, financial, human), value proposition (creating value for customers, satisfying their needs, and solve their problems), customer relationships, channels (how a company reaches its customers to deliver value), customer segments (mass markets, niche markets, segments), revenue streams, and cost structure 8 most important aspect) 7. The five letters for digital transformation and its impact on business strategy formulation The strategic driver of digital transformation: 1. Customer (customer-centricity vision), 2. Competition (competitive advantage), 3. Data (non-structured and structured), 4. Innovation (new business models), and 5. Value (value propositions). 1. Customers: customers are becoming dynamically connected and interacting with each other and shaping business reputations and brands. Businesses need to rethink their traditional marketing funnel and reexamine their customer's path to purchase, recognizing that dynamic, networked customers can be valuable focus groups, brand champions, or innovation partners. a. i. From mass markets to a dynamic network, communication broadcast to communications 2-way, firm as the key influencer to the customer as the key influencer, marketing to persuade marketing to inspire a purchase, loyalty, and advocacy, one-way flows to reciprocal value flows, and economies of (firm) scale to economies of (customer) value. b. ii. Strategic themes: harness customer networks. 2. Competition and platforms: Competition is becoming fluid with industry boundaries and asymmetric competitors. Digital disintermediation is upending partnerships and supply chains, making former partners potential competitors. Digital technologies are also enabling platform business models which allow one business to capture value by facilitating interactions between other businesses or customers. a. Strategic themes: build platforms, not just products. b. Key concepts: i. platform business models, ii. (in)direct network effects, iii. (dis)intermediation, and iv. competitive value trains 3. Data: With social media, sensors, and mobile devices, every business has access to large amounts of unstructured data that can be used to make predictions and discover patterns. Data is becoming an asset to be developed and deployed over time. a. Strategic themes: turn data into assets. Key concepts: i. templates of data value ii. drivers of big data iii. data-driven decision making  4. Innovation: Innovation is managed with a focus on continuous learning through rapid experimentation, enabled by digital technologies that make it easier to test ideas. This approach is focused on careful experiments and minimum viable prototypes that maximize learning while minimizing cost. a. Strategic themes: innovate by rapid experimentation. b. Key concepts: i. divergent experimentation, ii. convergent experimentation, iii. minimum viable prototype, and iv. paths to scaling up 5. Value: a business value proposition is constantly changing and relying on an unchanging value proposition invites challenges and disruption from new competitors. Businesses should focus on constantly evolving their value proposition, looking to new technologies to extend and improve the value they offer to customers. a. i. Strategic themes: adapt your value proposition. b. ii. Key concepts: i. concepts of market value ii. paths out of a declining market iii. steps to value prop evolution Digital Innovation: using digital and IT technology for creating new products, services, processes, or business models. Typologies of innovation: Product innovation: development of new products; improvement of existing products; to generate/increase sales Service innovation: development of new services; development of a new service delivery system: a client interface Product-Service-System Innovation: Combination of products and services; offering additional services to an existing product; pay-per-use models where the product can be used on a fee Consumers search for the value associated with an offer (products/services) not the asset Ws for a major project: Why: triggers for transformation (revenues opportunities of emerging markets or new technologies; market threats; internal crisis within the enterprise; transformation initiatives of main competitors, and all or majority, together) What is transformation? It refers to major changes that are not routine, but fundamental and that substantially alter an organization’s relationships with its key  constituencies. It addresses radical enterprise-wide changes and not incremental or local changes. Also known as business transformation, organization transformation, and enterprise transformation. Examples of fundamental transformation: ○ (1) significant changes to the business model ○ (2) mergers or acquisitions ○ (3) introduction and replacements of enterprise IT systems Reasons for failure: Sense of urgency not established Lack of a powerful guiding team Vision not created or not communicated Insufficient planning Improvements not consolidated New approaches not institutionalized Almost 30% of transformation projects fail and only 30% are considered a full success Is digital transformation a performance driver? It’s dangerous to measure transformation by only looking into the financial measures. Many relevant factors during transformation influence performance in the long run, but not in the short run. The company’s ability to align, execute, and renew itself faster than its competitors is called organizational health. Health is positioned next to financial performance, which is important to satisfy stakeholders. Robust health should also be maintained to stay competitive in the long run. So, good health, and thus a strong transformation capability, also has a significant impact on financial figures. 8. Innovation as a strategic choice 8.1 Interactive strategies Innovation is more complex than invention. The invention involves the conversion of new knowledge into a new product, process, or service. Innovation involves the conversion of new knowledge into a new product, process, or service and the putting of this new product, service, or process into actual commercial use (the most challenging aspect). Innovation raises three dilemmas: 1. Technology push or market pull: a. technology push, is the new knowledge created by scientists or technologists that pushes the innovation process (the outcomes from R&D labs). b. market pulls, which reflect a view of innovation that goes beyond invention and sees the importance of actual use. It’s the pool of users in the market that is responsible for innovation. Approaches to market pull: i. Lead users: principal source of innovation (top surgeons, lead sportspeople).  ii. Frugal innovation: pull exerted by ordinary consumers, particularly the poor in emerging markets. Involves sensitivity to poor people’s real needs. Emphasizes low cost, simplicity, robustness, and easy maintenance. 2. Product or process innovation: a. product innovation relates to the final product or service to be sold, about its features. b. process innovation related to the way in which this product is produced and distributed, about improvements in cost or reliability. Implications of process/product innovation model (a design is the standard configuration of basic features): i. New developing industries: typically favor product innovation, as competition is still around defining the basic features of the product ii. Maturing industries: favor process innovation, as competition shifts towards efficient production or a dominant design of a product iii. Small new entrants: have the greatest opportunity in the early stages of an industry, when dominant designs are either not yet established or beginning to collapse iv. Large incumbent firms: have the advantage in later stages, during periods of dominant design stability, when scales and the ability to roll out process innovations matter most. 3. 3. Open or closed innovation: a. (1) closed innovation is the traditional approach to innovation relying on one's own internal resources (laboratories and marketing departments). b. (2) open innovation involves the deliberate import and export of knowledge by an organization to accelerate and enhance its innovation (exchanging ideas openly is likely to produce better products more quickly). The balance between open and closed innovation depends on: i. (1) competitive rivalry, ii. (2) one-shot innovation (Opportunistic behavior is more likely where innovation involves a major shift in technology), and iii. (3) tight-liked innovation (Where technologies are complex and tightly interlinked, open innovation risks introducing damagingly inconsistent elements, with knock-on effects throughout the product range). Types: 1. Collaboratoreis 2. Crowdsourcing: a form of open innovation that means that a company broadcasts a specific problem to a crowd of individuals or teams. 3. Platform ecosystems: groups of mutually dependent and collaborative partners that need to interact to create value for all. 8.2 Innovation diffusion Diffusion: is the process by which innovation spreads among users. Since innovation is expensive, its attractiveness can hinge on the pace – extent, and speed – at which the market adopts new products and services. Managers can influence the pace of diffusion from the supply and demand sides, which they can also model using the S-curve. Determinants of diffusion (supply side) Degree of improvement in performance above current products that provide incentives to change. Innovations' benefits need to exceed development costs. Compatibility with other factors. Managers need to ensure appropriate complementary products and services are in place Complexity whether in the product or in the marketing methods being used to commercialize the product Experimentation is the ability to test a product before committing to a final decision – either directly or through the availability of information about the experience of other customers. Relationship management is how easy it is to get information, place orders, and receive support. Determinants of diffusion (demand side): Market awareness: many potentially successful products have failed due to a lack of consumer awareness – when the promotional effort of the innovator has been confined to pushing a promotion to its distributors Network effects: refer to the way that demand growth for some products accelerates as more people adopt the product or service. Once a critical mass of users has adopted it, it becomes of much greater benefit, or even necessary, for others to adopt it too Customer propensity to adopt: the distribution of potential customers from early adopter groups (keen to adopt first) through laggards (indifferent to innovations). Innovations are often targeted initially at early-adopter groups to build the critical mass that will encourage more laggardly groups to join Diffusion S—curve The pace of diffusion is not steady. Successful innovations often diffuse according to an S curve pattern, which reflects a process of initial slow adoption of innovation, followed by a rapid acceleration in diffusion, leading to a plateau representing the limit to demand. S-curve points to four likely decision points: Tipping point: where demand for a product or service suddenly rises, with explosive growth. Tipping points are particularly explosive where there are strong network effects (where the value of a product is increased by the more people in a network use them) Timing of the plateau: a likely eventual slowdown in demand growth. The extent of diffusion: s-curve does not lead to 100% of diffusion among potential users. Managers need to estimate the final ceiling of diffusion. Tripping point: when demand collapses. The decline is more gradual, but the tripping point warns managers that a small dip could presage a more rapid collapse. 8.3 Innovators and imitators A choice for managers is to lead or to follow in innovation. There are two types of movers: 1. first movers where an organization is better off than its competitors because of being first to market with a new product, process, or service (theoretically is a monopolist able to charge customers high prices without fear of undercutting by competitors) 2. late-movers are companies or individuals that enter a market or industry that has already been established by early adopters. First-movers’ advantages: Network effects: a customer of a product or service has a positive effect on the value of that for other customers and if they are present and captured by an individual firm it’s difficult for late entrants to catch up and build their own network of customers Experience curve benefits: rapid accumulation of experience with the innovation gives them greater expertise than late entrants. Scale benefits: first movers establish earlier than competitors the volumes necessary for mass production and bulk purchasing Pre-emption of scarce resources: first movers have access to key raw materials, skilled labor, or components, and late movers will have to pay more for these. Reputation: enhanced by being first, since consumers have little mind-space to recognize new brands once a dominant brand has been established Buyer switching costs: first movers can lock in their customers with privileged or sticky  relationships that later challengers can only break with difficulty. Late movers’ advantages: Free-riding: late-movers can imitate technological and other innovations at less expense than originally incurred by the pioneers. Learning: late movers can observe what worked well and what did not work well for innovators. Some argue that the best response to innovation is often not to be the first mover, but to be a fast second. A fast second strategy involves being one of the firsts to imitate the original innovator and thus. Building an ‘early mover advantage’. Thus, fast second companies may not literally be the second company in the market, but they dominate the second generation of competitors. 8.4 Incumbents’ response Established companies, known as incumbents, need to face disruptive innovation which creates substantial growth by offering a new performance trajectory that, even if initially inferior to the performance of existing technologies, has the potential to become markedly superior. Incumbents' response to disruptive innovation: Develop a portfolio of real options: companies that are most challenged tend to be those built upon a single business model and with one main product or service. By building portfolios of real options, they can maintain organizational dynamism. Real options are limited investments that keep opportunities open for the future. The portfolio identifies three kinds of options (positioning, scouting, and steppingstone) Corporate venturing: the practice of large incumbents’ organizations establishing relatively autonomous “new venture units”, that will prepare themselves and learn, to nurture new ideas or invest externally and acquire novel and untried businesses with a longer-term view. Intrapreneurship: approach that emphasized the individual and the ability to perform entrepreneurial activities within a large organization. Companies can encourage employees throughout the organization to be creative and develop entrepreneurial ideas as part of their regular job. 9. Methodologies to support the implementation of a business strategy with DT Business strategy + Digital transformation = Digital Business Strategy ∙ A strong Digital Core enables to reimagine of businesses for the digital economy but, technology is not enough Justification to introduce methodologies: a low success rate of business transformation projects, and lack of holistic management approaches. Methodologies are necessary to handle large/complex transformation projects and they all start with looking at the Business strategy: Mckinsey 7S framework: focused on diagnostic techniques, rather than on analysis and implementation. Hard elements: 1. Strategy: states the direction of what the company wants to achieve in the long term. a. what’s our strategy b. how do we intend to achieve a competitive advantage c. how to deal with changes in customer demand d. how to adapt to dynamics and external environment 2. Structure: Organization, hierarchy, business units, responsibilities. a. how is the company divided, and what hierarchies b. how do the various parts of the organization coordinate c. what is the decision making and controlling process (centralized/decentralized) d. which are the internal communication channels, and how efficient they are 3. Systems: MIS, channels of contact with customers/suppliers. a. which is the IS architecture, b. how are these monitored, evaluated, and evolved, c. how do they compare with similar companies, and d. which is the level of alignment with business objectives Soft elements: 1. Shared values: guidance to employees on the values and beliefs of the company. a. fundamental values (trust, professionalism), b. how deep are these imbibed in all the workforce, and c. what is the company culture 2. Skills: competencies and resources capabilities existing in the company. a. how strong are the skills, b. which are the skills gaps, and c. how are the skills assessed and addressed needs 3. Staff: employees and respective lifecycle, development, training,  motivation, evolution. a. in each department which is the specializations, b. which are the gaps to fulfill specialization, and c. which are the competence gaps 4. Style: leadership way of managing and operating. a. how participative is the management style, b. how effective is the leadership, and c. what is the style of motivation Enterprise Strategic Analysis for Transformation (ESAT) Method influenced by the defense sector Framework aiming to set up appropriate governance and improve actionable transformation plan It includes an understanding of the enterprise value streams and considers value flows between key stakeholders and the enterprise (like BTM) Principles: ○ adopt a holistic approach to enterprise transformation ○ identify relevant stakeholders and determine their value propositions ○ focus on enterprise effectiveness before efficiency ○ address internal and external enterprise interdependencies ○ ensure stability and flow within and across the enterprise ○ cultivate leadership to support and drive enterprise behaviors ○ emphasize organization learning. Reasons to do a major product: why? Assessment of objective and expected benefits. What? Scope. How? The process, requirements, and next steps are Aimed at: ○ (1) diagnosis and improvement of overall enterprise performance, based on qualitative and quantitative analysis of the enterprise's current state ○ (2) leading to the creation of a future state vision, actionable transformation plan, and infrastructure for support of the transformation implementation Helps to: ○ (1) identify strengths and weaknesses in current performance, through an assessment of the enterprise’s current state ○ (2) indicate future performance, envision a desirable future state, and provide input into future strategy and/or implementation plans. BCG methodology: business strategy (driven or driving), ecosystems similar concept of competition/platforms, same regarding Data & Analytics, People & Organization BTM (Business Transformation Management) methodology: A holistic framework for business transformation, digital transformation, and digital innovation projects. Comprises four transformation phases and integrates discipline-specific technical and methodological expertise from several areas:  ○ (1) envision (create a case for change, sense of urgency, strategy/vision) ○ (2) engage (empower people to act on the vision and plan the effort) ○ (3) transform (change behavior, processes, technology, culture, values) ○ (4) optimize (internalize, institutionalize, and stabilize transformation) Methodologies evolution: provide the big picture for the upper management Objective: support management of large-scale transformation initiative (business model changes, post-merger integration, shares service center implementations) supported by digital technologies Business transformation must balance economic, social, and technical aspects. It requires the involvement of fields such as management, psychology, and IT which are mirrored by the following disciplines: Meta management (framework of individual disciplines), direction for the transformation effort (strategy management, value. Management, risk management), and enablement (business process management, transformational IT management, Organization changes management, Competences, and training management, and program/project management) BTM Direction levers: ○ (1) Strategy management (industry driver – business models – organization & business processes – technology) ○ (2) value management (envision – value identification, engage – plan benefit realization, transform – execute benefit plan and evaluate results, and optimize – establish potential for further improvements) + (generic types of benefit in strategic, management, operational, and functional fields) ○ (3) risk management (the longer the project the higher the risk + after 3 years rates are significantly higher than average and rise exponentially) Digital technologies interact with business strategy to achieve competitive advantage in the medium and long-term