Economics and Business Organisation Chapter 5 PDF

ECONOMICS AND BUSINESS ORGANISATION Daniel EVANS Bachelor ABM1 never stop daring audencia.com CHAPTER 5 STRATEGY never stop daring CHAPTER OUTLINE I. The notion of strategy A. Definition B. Building competitive advantage C. The diffe...

ECONOMICS AND BUSINESS ORGANISATION Daniel EVANS Bachelor ABM1 never stop daring audencia.com CHAPTER 5 STRATEGY never stop daring CHAPTER OUTLINE I. The notion of strategy A. Definition B. Building competitive advantage C. The different levels of the strategy II. Corporate strategies A. Specialization B. Diversification C. Horizontal and Vertical Integration III. Competitive Business strategies A. Broad Cost Leadership and Cost Focus B. Differentiation and Differentiation Focus IV. Development strategies A. Internal growth B. External growth C. Joint growth D. Internationalization 3 LEARNING GOALS At the end of this chapter, students should be able to : Explain different levels of strategic decision making and provide examples Describe different ways companies can create competitive advantage Explain how scale economies and learning curves create cost advantages Explain the different degrees and types of innovation Apply the Ansoff matrix to a company case Explain the four strategies of the Ansoff matrix and the challenges of each Explain the difference between horizontal and vertical integration Explain the difference between backward and forward vertical integration Describe the four generic strategies as proposed by Michael Porter (give examples) Explain how cost leadership and differentiation can be accomplished Explain internal vs external growth strategies Describe the different types of M&A that can happen Explain the benefits of the four different forms of alliances Describe the different modes of international market entry and the benefits/challenges of each 4 I. THE NOTION OF STRATEGY never stop daring I. THE NOTION OF STRATEGY Definition Etymologically, the word strategy is borrowed from the military world and means “the art of leading an army”. In economics, strategy is a set of decisions that commit the company over the long term. She seeks to ensure the survival of the company and to organize its future. 6 I. THE NOTION OF STRATEGY Definition Strategy is the response to : environmental opportunities and threats (macro and microenvironment). and to the internal strengths and weaknesses of the company in order to build and defend its competitive advantages over competitors 7 I. THE NOTION OF STRATEGY B. Building competitive advantage According to Michael Porter, a competitive advantage : It is the ability of an organization to sustainably obtain better performance than its competitors. = The key to success 8 I. THE NOTION OF STRATEGY B. Building competitive advantage A company's competitive advantage is based on 3 elements: The Resources and The Company Capabilities of the Innovations Dimension Company Economies of scale Learning Curve Product Critical Size Organisational Process efficiency Organisational Synergies Brand/marketing Incremental/rupture 9 I. THE NOTION OF STRATEGY B. Building competitive advantage 1. Economies of scale : the company reduces the unit production cost by increasing the quantities produced (fixed costs are better amortized). With a cost domination strategy, it increase profit. It can then pass on the reduction in costs by offering lower prices to consumers…but a low cost leader is not necessarily the low price leader ! 10 I. THE NOTION OF STRATEGY B. Building competitive advantage 2. Critical size: this is the size that a company seeks to reach a threshold above which it will improve its profitability. We distinguish : Technical critical size : efficiency of the production process. Commercial size : linked to the power that size confers on a market taking into account notoriety (ex. negotiation power) Financial critical size : company with easy access to financial markets given their importance. 11 I. THE NOTION OF STRATEGY B. Building competitive advantage 3. The learning curve effect: the unit cost of a product decreases by a constant percentage each time the cumulative production of this product doubles. Ex: In the automobile industry this percentage is 10%. When vehicle production is doubled, the unit cost tends to decrease by 10%. The learnig curve effect improves productivity. The company can then lower its prices or increase its margins. 12 I. THE NOTION OF STRATEGY B. Building competitive advantage 4. Organizational efficiency: this is the ability to produce a good while minimizing the resources used. It is linked to the structure of the company. Structures that allow individuals to gain autonomy or responsibilities (fewer layers) promote the responsiveness and competitiveness of the company. 13 I. THE NOTION OF STRATEGY B. Building competitive advantage 5. Synergies : corresponds to the economy of means resulting from the pooling of complementary resources and skills 1+1=>2 Ex: Fnac-Darty merger Synergy helps achieve cost leadership or differentiation (proposal of an offer with a higher perceived Value Added). 14 I. THE NOTION OF STRATEGY B. Building competitive advantage 6. Innovation There are many different types of innovation including: Creation of a new and useful good or service (ex. AirBNB) Product → Often in early stages of industry lifecycle New ways to produce or distribute ((ex; Drive) Process → Often in more mature markets Organisational New practices in the company (ex: Liberated company) Marketing New practices in the sales/marketing (ex: e-business) 15 I. THE NOTION OF STRATEGY B. Building competitive advantage Innovation can also be characterized by its degree: Incremental innovation: improvement of an already existing offer. (ex. new versions of software, iPhone 10,11,12… Radical innovation: completely new products, process, markets that are revolutionary (internet, gene editing) Disruptive innovation : innovation that disrupts the market. Often proposed by new entrants in a niche but that spreads. (AirBnB, Netflix) The objective of innovation is to create a monopoly profit (rent) because the VA of the product is perceived as higher by customers. The strategy is therefore that of differentiation. Ex: Apple with the iPhone in 2007 16 I. THE NOTION OF STRATEGY C.The different levels of strategy Corporate- … Is concerned with the overall purpose and level scope of an organisation and how value will be strategy added to the different parts of the organisation … Is about how to compete Business-level successfully in particular markets strategy … Is concerned with how the components parts of an Operational or Functional organisation deliver effectively the strategy corporate- and business-level strategies 17 I. THE NOTION OF STRATEGY C.The different levels of strategy Concerns the company as a whole. What businesses should we undertake? Corporate How to grow (Merger? Organic) ? Wher and how to diversify? Corporate Brand, values, mission Each area of activity will have its own strategy. How can we build compettiive advantage over our rivals? Business How do we segment the market? What is our value proposition? How are we positioned vs. our competitors? Concerned with the execution of the day-to-day tasks and activities that contribute to the overall strategy Operational How can we best deliver our value proposition? How do we uses resources most effectively? How can we improve processes? (ex. lean) 18 I. THE NOTION OF STRATEGY C.The different levels of strategy Should we focus on telecom and less on building? Should we buy another television channel? How can we beat France2 in total audience? How can we attract more advertising revenue? 19 II. CORPORATE STRATEGIES never stop daring II. CORPORATE STRATEGIES Corporate strategies focus on the composition of the company's business portfolio. This portfolio can consist of: From a single activity Specialization Several activities Diversification 21 II. CORPORATE STRATEGIES Specialization and Diversification : The Ansoff Matrix Products/Services Existing New Existing Markets New 22 II. CORPORATE STRATEGIES A. Specialization The company focuses on the development of a single strategic business area in order to to improve and consolidate its competitive advantage. The objective is to create: An experience (learning curve) effect which allows the company to assert itself as an expert in its market. But also develop economies of scale to achieve greater profitability. 23 II. CORPORATE STRATEGIES A. Specialization Products/Services Penetration Strategy to increase depth in Existing New existing market. Existing A Build market share Penetrate/ Consolidate Markets through agressive or Customer marketing / pricing Base policies. New Increase use rates and frequency. 24 II. CORPORATE STRATEGIES A. Specialization The specialization strategy has both benefite and risks : Simplicity of implementation. Vulnerability in the event of an unfavorable environment (new competitor, market saturation). Concentration of resources on a single strategic axis. Risk of organizational rigidity: limited capacity for Image of specialist and leader. adaptation and change. Development of experience and economies Room to grow may be limited if market is saturated. of scale. 25 II. CORPORATE STRATEGIES B. Diversification The company seeks to develop one or more new areas of activity. This strategy therefore makes it possible to expand a company's portfolio of activities, production and targets. 26 II. CORPORATE STRATEGIES B. Diversification Product Development Products/Services and Diversification Existing New to increase product range in existing market Existing A B Penetrate/ Consolidate New Products Launch new product to a Markets « Same » Market client you understand or Customer well and that knows YOU Base New Develop new product lines (gammes) (high vs low quality, etc.) 27 II. CORPORATE STRATEGIES B. Diversification Examples: Apple Watch (wearables) Tesla Model Y Starbucks : New beverages Ducros : herbs from Provence, then spices, then flavorings for cakes and condiments… Rossignol : Skis, Ski boots, Tennis, … 28 II. CORPORATE STRATEGIES Market Development B. Diversification to extend current products into new markets. Often focuses on Geographic Products/Services diversification. Existing New Small product changes to Existing A B adapt to local critical Penetrate/ Consolidate New Products success factors (ex. local tastes Markets or « Same » Market for geographical diversification) Customer Base New distribution systems New C (ex. home delivery) « Same » Products New Market New market segments (demographics) 29 II. CORPORATE STRATEGIES B. Diversification Examples: McDonalds Ben & Jerry’s: Non-Dairy Ice Cream for Health-Conscious Consumers Cosmetics for Men 30  Conglomerate II. CORPORATE STRATEGIES Diversification (or just B. Diversification « Diversification ») Offering new products to Products/Services new markets Existing New This is “unrelated” diversification as products Existing A B and markets do not have a Penetrate/ Consolidate New Products « Same » Market direct link with those in Markets or which the company was Customer previously positioned Base New C D « Same » Products Conglomerate New Market Diversification Protect from demand (unrelated) changes, market risks, seasonality 31 II. CORPORATE STRATEGIES B. Diversification Examples: BIC Bouygues 32 II. CORPORATE STRATEGIES B. Diversification The factors behind diversification differ depending on the company: In the best case, the company seeks to diversify as part of its development : diversification of growth. But in the event of internal difficulties or a market crisis, diversification becomes necessary : recovery diversification. 33 II. CORPORATE STRATEGIES B. Diversification Each strategy of the Ansoff matrix has different challenges. Products/Services Existing New Low risk Moderate risk Least challenging as you know Challenges include: product and market but you still - R&D to develop new offer must manage : - Customer acceptance Existing - Increased competition - Product development time & cost Markets or - Market saturation Customer Moderate to high risk High risk Base Challenges include: Challenges include: New - Understanding new customers - Understanding market & product - Regulatory & logistics barriers (no experience effect) - Supply chain complexities - Intense use of resources to succeed - Brand recognition - Managing new operations - Brand recognition 34 II. CORPORATE STRATEGIES B. Diversification The diversification strategy has benefits and risks : Distribution of risks across several High costs. activities. Dispersion of resources and skills, Synergies. Management complexity. Acquisition and mastery of new skills. Loss of flexibility. Ensures business growth. Risk of dilution of the company's identity. 35 II. CORPORATE STRATEGIES C. Horizontal and Vertical Integration Vertical diversification or integration: consists of internalizing activities upstream or downstream of the company's central activity (by purchasing its own distribution network, by purchasing its suppliers, etc.). Examples: Michelin, Intermarché, Total… Agricultural farms that sell directly… 36  VERTICAL INTEGRATION STRATEGIES Backward or Forward or « upstream » « downstream » integration integration Components Components Components Ex. Starbucks Manufacturer Manufacturer growing it’s Manufacturer own beans Value network & Capture upstream Ex. Airlines Automobile Automobile profits Automobile selling tickets Manufacturer Manufacturer Manufacturer directly to clients & Capture Automobile Automobile Automobile downstream Concession Concession Concession profits 37 II. CORPORATE STRATEGIES C. Horizontal and Vertical Integration Horizontal integration occurs when a company acquires or merges with another company that operates at the same level of the supply chain or industry. It involves expanding operations by acquiring or merging with businesses that provide similar products or services. Examples: Facebook acquires Instagram Disney acquires pixar 38