Competitive Strategy - Carla Pujol Echevarría PDF

COMPETITIVE STRATEGY Maria José Parada Carla Pujol Echevarría 4º GBD ÍNDICE SESSION 1: INTRODUCTION TO STRATEGY PART 1 4 INSIGHT INTO THE COURSE...

COMPETITIVE STRATEGY Maria José Parada Carla Pujol Echevarría 4º GBD ÍNDICE SESSION 1: INTRODUCTION TO STRATEGY PART 1 4 INSIGHT INTO THE COURSE 4 EXPLORING FAILURE OF COMPANIES 5 THE CONCEPT OF STRATEGY 6 OPERATION VS. STRATEGIC MANAGEMENT 8 LEVELS OF STRATEGY 8 COMBINATION OF STATEMENTS TO COMMUNICATE THE FIRM’S LONG-TERM DIRECTION 8 STRATEGIZING, THE FORMULATION OF STRATEGY 9 SESSION 2: INTRODUCTION TO STRATEGY PART 2 10 EXPLAINING OUR PERSPECTIVE: PLANNED VS EMERGENT STRATEGY 11 A BASIC STRATEGIC ANALYSIS MODEL 12 CHANGE IS A FACT OF LIFE – STRATEGY AND CHANGE 12 PESTEL ANALYSIS 14 REPSOL PESTEL ANALYSIS 15 HOW NOT TO GET LOST: 17 WHY THE FUTURE IS DIFFICULT TO FORETELL 18 SOME METHODOLOGIES TO EXPLORE THE FUTURE AND DEVELOP FORESIGHT 18 SCENARIOS 19 SESSION 3: LOOKING AT THE INDUSTRY 22 APPLE – EPIC GAMES 22 AUTOMOBILE SECTOR 22 APPLE SUFFERS THE CHINESE CHANGE OF ERA 23 WHY DO SOME INDUSTRIES OUTPERFORM OTHERS? 23 THE DIFFERENCE BETWEEN MARKET AND INDUSTRY ANALYSIS: 23 SOUTHWEST AIRLINES CASE 24 SESSION 4: TYPES OF STRATEGY 28 IDENTIFYING STRATEGIC BUSINESS UNITS 28 COMPETITIVE ADVANTAGE 29 GENERIC STRATEGIES 29 Differentiation 30 Cost Leadership Strategy 32 Focus Strategy 33 Going through Passeig de Gràcia 34 SESSION 5: ALTERNATIVE COMPETITIVE ADVANTAGE 36 THE STRATEGY CLOCK 36 NEW APPROACHES TO STRATEGY & DIFFERENTIATION 36 BLUE OCEAN STRATEGY 36 RED OCEAN VS. BLUE OCEAN STRATEGIES 37 AN ALTERNATIVE VIEW OF COMPETITIVE ADVANTAGE 37 VERITAS CASE STUDY 38 SESSION 6: CASA AMETLLER VS. VERITAS 42 SESSION 7: RESOURCES AND CAPABILITIES 44 INTRODUCTION 44 RESOURCES & CAPABILITIES 45 Dynamic capabilities 47 Threshold capabilities 48 Distinctive capabilities 49 Key Result Areas (KRAs) 49 2  HOW DO WE ASSES OUR RESOURCES AND CAPABILITIES? 49 Common barriers to imitate valuable resources & capabilities from competitors: 49 The VRIO Framework 49 STRATEGY IMPLICATIONS 51 Resource trade-offs 51 Fit and Stretch & the SWOT Analysis 51 AMAZON GO CASE 52 SESSION 8: DEVELOPING RR&CC 55 HOW DO FIRMS DEVELOP RESOURCES THAT MATTER? 55 UNDERSTANDING DYNAMIC CAPABILITIES 55 How do firms respond to change in the market place? 55 Some examples of Dynamic Capabilities 56 STRATEGIC FACTOR MARKETS: HOW DO WE ACQUIRE RESOURCES 57 How do firms improve their foresight? 57 Reminder: A caveat 57 Some tools to sense market and technological opportunities 57 DISINVESTMENT AND COMMON PROBLEMS WITH RESOURCE DIVESTURE 57 MOTOROLA CASE 58 XAVIER ARDERIU – MEDIAPRO 60 WRAP-UP 60 SESSION 9: UNDERSTANDING PLATFORM BUSINESS MODELS 61 INTRODUCTION 61 FROM PIPELINES TO PLATFORMS 62 WHAT ARE PLATFORM BUSINESSES? 64 TYPES OF PLATFORMS 65 DIRECT AND INDIRECT NETWORK EFFECTS 66 HOW TO ATTRACT ANY OF THE SIDES TO PARTICIPATE 67 Which side to subsidize? 67 Other Tactics to Get Both Sides Onboard 67 CONCLUSIONS 68 GLOVO CASE 68 WRAP-UP 72 SESSION 10: VALUE CHAIN 73 INDUSTRY VALUE CHAIN 73 The industry value chain 73 How can value change? 76 COMPANY VALUE CHAIN 79 The company value chain 79 Core Activities 83 Strategies to follow in relation to activities 85 FORD CASE 89 3 SESSION 1: Introduction to Strategy Part 1 Insight into the course What is the course about? - First exposure to strategy, strategic thinking and strategizing - We will cover: o Strategy: concepts, tools and principles of strategy formulation and competitive analysis o Strategic thinking: the mental process to generate business insights and opportunities to achieve a sustainable competitive advantage o Strategizing: understanding the hands-on activities, the doing of strategy in the organization in different …. Objectives of the course: - Develop ability and skills in designing sound business-level strategies - Gain a global vision of the organization as a whole by integrating the knowledge learned in the course and in previous GBD courses - Be able to apply relevant frameworks and tools for analyzing a firm’s general environment, industry and internal organization - Understand the strategy process (analysis, development and implementation), the actors participating in it (top management, board of directors and others) as well as the need to adapt the process to different industry contexts - Develop strategic skills to: o Identify strategic issues o Search the necessary information o Generate strategic options and make a recommendation on which option to choose by using evidence-based arguments Methodology: - Based on Mintzberg triangle: o Science: theory o Craft: learn from what the master is doing o Art: ability to be creative and see beyond the obvious Final project: - Choose a company - First come first serve basis – no repetitions will be allowed - Make sure to do “information research” prior to choosing the company 4  - As a consultant, analyze the company and make recommendations to the board of Directors - First analyze the environment (PESTEL analysis), then understand the industry (5 forces framework, how competitive is it?) and dissect the micro industry (segment, effective competition) where we can find the value proposition of the company, which has to be analysed through: o Resources o Capabilities o Financials à we get much information: § Size of company and industry or micro-industry § Performance in economic terms - Make sure that the document is clear and follows logical sequence and that the whole doc is the same key Exploring failure of companies What do these companies (Kodak, GM, Blockbuster, Delta, Worldcom, Lehman Brothers) have in common? - Bankrupt - Leaders in industry - American - They did not adapt - Overconfidence à too big to fail - Did not innovate - Focused on the company and not on the customer needs - Didn’t seize the opportunities - Focus on the short-term not long-term Strategy has to do with the long-term, thinks about the future, which makes it difficult and uncertain. It explains why some fail and others succeed. Blockbuster - Had the opportunity of buying Netflix and said no as never thought the market could change (didn’t understand how thee environment was changing) - Didn’t shift their business model of renting movies Kodak - They were not able to retain their mission: providing analogical solutions for photography. 5  - Didn’t seize the “digital” opportunity What do they not have in common? - Belong to different industries - When? In bad and good economic times - How much time took to get to bankruptcy? Days (Lehman Brothers) or many years (GM) The concept of strategy - A guide to achieve an objective - The competitive game plan - A way to create competitive advantage - Long-term planning (mission values, vision) - Long-term direction of the company - The way we allocate resources - Pattern à planned, emergent - Adapting / reacting to the environment Need to think about - How do we allocate resources - How do we sustain the position in the market - How do we maintain the existence of the company You need to know where you want to go to find the best way to get there à that is what strategy is about, how to achieve a specific goal. There are multiple definitions: 6 The scope of the strategy - Shows who we are competing against - Allow us to avoid wasting money on things outside our scope - Allow us to allocate our resources efficiently It is easy to define “What we want to do” not that easy to define “What we don’t want to do” à trade-offs Strategy according to Porter “Strategy is about making choices on what an organization will seek to achieve and how it will deliver value” “Competitive strategy is about being different. It means deliberately choosing a different set of activities to deliver a unique mix of value” Example of different strategies in several industries Airlines: - Business, premium, lux - Economic, low cost Electric cars: - Lucid Air has adopted same value proposition (fully electric and high autonomy) than Tesla to compete Is it becoming a commodity? Do we want to? Commodity: good with value and utility but low differentiation So, a “good” strategy… provides clear answers to 4 key questions: - Where do we compete? - What unique value do we bring - What resources and capabilities do we utilize? - How do we sustain advantage? Why is strategy critical for the success of a company? - The strategy defines the long-term direction to follow, integrating all the elements of the existence of a company - Identify what to do and what not to do (a denial process), identifying both priorities and trade-offs - Facilitates alignment with the company (owners, managers, employees) and with relevant stakeholders (suppliers, partner companies) 7  - Reduces uncertainty in the market among stakeholders Operation vs. Strategic Management STRATEGIC OPERATIONAL - Long-term - Short-term - Outward - Inner organization - Intangible (vision, uncertainty) - Tangible (processes, certainty) - Qualitative - Quantitative - Broad organizational focus - Narrow organizational focus - Change oriented - Focused on what already exists - Extrovert - Introvert - Problems not obvious, mostly - Visible problems, mostly reactive proactive - Functional vision - Global vision Levels of strategy 1. Corporate Strategy a. Overall influence b. Business/es we should be in c. Resource investment & profitability d. Synergies 2. Business Strategy à How to compete successfully in particular markets 3. Functional Strategy à How different parts of organization deliver business strategy Combination of statements to communicate the firm’s long-term direction 8  - Mission: should state exactly what the company does, its nature o What: need does it attempt to satisfy? (Type of need) o Who: is it aimed at? (Market segment/s) o How: does it do it? (Technology or knowhow) A good mission statement should explain the reason of being of the organization and the social need it fulfils (why it exists). Essential goal, overriding purpose of the organization. What business are we in? Contribution to society Example: Google - “To organize the world’s information and make it universally accessible and helpful” - Values: How employees should behave Example: IBM - In the end, IBMers determined that our actions will be driven by these values: o Dedication to every client's success o Innovation that matters, for our company and for the world o Trust and personal responsibility in all relationships - Vision: desired future goal of the organization Aspiration. What do we want to achieve? Example: Nike – "To bring inspiration and innovation to every athlete in the world" (Nike explained that everyone is an athlete, because everyone has a body) - Strategy: Specific, measurable and time bound o Objective: More precise and ideally quantifiable. They introduce discipline to strategy. What do we have to achieve in the coming period? o Scope: domain in 3 dimensions à 1) customers or clients 2) geographical location 3) extent of vertical activities (internal vs contracting out) o Advantage: how the organization will achieve the objectives. Competitive advantage Strategizing, the formulation of strategy Is strategic planning an oxymoron? No but give it some thought. 9 SESSION 2: Introduction to Strategy Part 2 When we analyze the macroenvironment, we are looking at factors that we cannot control but we can deal with thanks to strategy. For many years, they thought shareholder value maximization was the main focus. But when we think of a firm’s role in society we think of a broader stakeholder group, which includes: - Customers - Community - Suppliers - Governments If you want to satisfy one, eventually, you might not be able to satisfy another (e.g. shareholder value maximization vs. Green peace) à trade-off. If we only look at maximization of value for shareholders we would take costs to the minimum value à lower pays, reducing number of employees, worst raw materials (more polluting). If we also aim to create a better society, we can’t only look at shareholder value maximization. This will inevitably affect the value for shareholders (e.g. if we reinvest into CO2 reduction less money will go to shareholders) but it is the trade-off for wanting to take care of society. - Ex: Wolkswagen à lied about adding a CO2 reduction component to be able to get to the desired result and satisfy shareholders. Sustainability has become a key factor in the agenda of firms and governments, but it requires investment which will lower returns. We live in a changing “vuca” world: - Volatility - Uncertainty - Complexity - Ambiguity Due to this it is very difficult to plan and predict, thus we need to adapt to the changing environment. To do that we need: 1. Understand the macroenvironment 2. Think about drivers of change, possible scenarios (about 4), as this gives us the flexibility to move on when something changes Thus, it is important to discuss scenarios and choose between strategic options. For that it is important the amount and quality of data we have to make those decisions. Watch out, as historical data cannot be used alone as history might not repeat itself, we also have to be alert about current trends and indicators. Once discussed, we must drive organizational action (execution). This execution will generate results: 10 Explaining our perspective: Planned vs Emergent Strategy We have to go with our intended strategy and try to deliberate and accomplish realized strategy but always being able to cope with emergent strategies. - Planned strategy is the outcome of a deliberated process whereby the inner workings and the outer environment of the company are analyzed and assessed as a basis for deciding among the alternatives that arise from that analysis. - Emergent strategy refers to a a more incremental, cumulative and intuitive way of thinking and deciding about strategy: informal, unplanned and reactive to unforeseen changes in the environment. In the words of Henry Mintzberg: one way leads to strategy through planning, the other through learning. Remember that in this subject, we will slowly go through layers until we get to the nucleus (from outwards to inwards): 1. Macroenvironment 2. Industry 3. Market 4. Company 11 A basic strategic analysis model Change is a fact of life – Strategy and change We can have 2 types of changes: - Exogenous: technology, institutions, consumer tastes, politics, economic (external factors) - Endogenous: new competitors, firm exit, competitive dynamics, new products (in our industry) The need to understand the macroenvironment is essential. If we look at the evolution of consumption of cement in Spain, we can see that in 2007 (peak, highest values) many could have not predicted the heavy decrease the consumption was going to suffer. At that moment, it was very important to look at the macroenvironment to understand whether such high values were going to last. We need to look for indicators and build scenarios and prepare for them. 12 Other examples: 13 PESTEL Analysis Political: - Government type and stability - Freedom of the press, rule of law and levels of bureaucracy and corruption - Regulation and de-regulation trends - Social and employment legislation - Tax policy, and trade and tariff controls - Environmental and consumer-protection legislation - Likely changes in the political environment - Foreign trade regulations - Social welfare policies Economic: - Stage of a business cycle - Current and projected economic growth (GNP), inflation and interest rates - Unemployment and supply of labor - Labor costs - Levels of disposable income and income distribution - Impact of globalization - Likely impact of technological or other changes on the economy - Likely changes in the economic environment - Disposable income Sociocultural: - Cultural aspects, health consciousness, population growth rate, age Distribution, - Organizational culture, attitudes to work, management style, staff attitudes - Education, occupations, earning capacity, living standards - Ethical issues, diversity, immigration/emigration, ethnic/religious factors - Media views, law changes affecting social factors, trends, advertisements, publicity - Demographics: age, gender, race, family size - Social mobility Technological: - Maturity of technology, competing technological developments, research funding, technology legislation, new discoveries - Information technology, internet, global and local communications 14  - Technology access, licensing, patents, potential innovation, replacement technology/solutions, inventions, research, intellectual property issues, advances in manufacturing - Transportation, energy uses/sources/fuels, associated/dependent technologies, rates of obsolescence, waste removal/recycling Environmental: - Ecological - Environmental issues, environmental regulations - Waste disposal - Energy consumption Legal: - Current home market legislation, future legislation - European/international legislation - Regulatory bodies and processes - Environmental regulations, employment law, consumer protection - Industry-specific regulations, competitive regulations - Product safety - Competition law Repsol PESTEL Analysis 1. We need to start by understanding the industry. The product. Are we talking about downstream or upstream? 2. Geography à need to distinguish whether our activity is national or international. In the second case, it is important to identify which country is generating the most revenue and operating revenue and understand whether it is because of upstream or downstream. Where can I get information from? a. SABI à For financials of Spanish companies b. MARKET LINE / STATISTA à For industry information 3. Look at factors that affect my costs, specifically in this case, at the oil price. 4. Identify new trends à Oil majors buy into green energy; Repsol adjusts its results to become a net zero emissions company by 2050; Repsol produce por primera vez en España blocombustible para aviación a partir de residuos. How are they transforming? Which resources and capabilities are they using? What is going to happen with the investment done to extract oik? Therefore: - Political 15  o Government stability, and openness to FDI o Taxation: national and international treaties o Foreign trade regulations o National energy policies o Renewables, nuclear, fossil fuels… o OPEC production decisions - Economic o GDP growth, GDP per capita growth o Interest rates o Inflation o Unemployment o Energy intensity o Infrastructure and connectivity: (inter)national o Oil price - Sociocultural o Demographics o Income distribution o Lifestyles and mobility o Carsharing vs car ownership? o Electric mobility in cities: ebikes, escooters… - Technological o Unconventional resource extraction capacity (shale gas, sand oil, deep water exploration) o Electric storage capacity o Electric storage raw materials o Electric charging technologies o Network (pipelines and grid) development o Renewable energy sources’ development - Environmental o 2015 Paris Agreement implementation o 2017 US withdrawal of Paris Agreement o Emission trading systems o Environmental regulations o Resource extraction regulations - Legal o Competition law o Investment law in strategic (i.e. energy) sectors o Monopolistic sectors law o Downstream (i.e. petrol stations) 16 It is very important to see change coming, to identify trends and start to adapt to them early on. We cannot realise that the industry has changed once it already has transformed. So it is important to look at predictions. How not to get lost: A lot of things change… what variables should a firm focus on then? à The variables that when changed require an update to firm strategy. Easier said than done: In the words of Jack Welch, long-time chairman of General Electric: “When the rate of change inside an institution becomes slower than the rate of change outside, the end is in sight. The only question is when.” Strategy is adaptation to the environment, it is preparing for tomorrow today, by trying to find out what tomorrow might be like. However, if we are fighting against turbulent environments this task is presumably going to be very difficult. We have to think in the long term, yet we find that we cannot foretell the future, we cannot extrapolate from what is happening today. Even “experts” fail in anticipating the future: - "Heavier-than-air flying machines are impossible” (Lord Kelvin, Professor of Physics, University of Glasgow, 1895) - “Stocks have reached what looks like a permanently high plateau.” (Irving Fisher, Professor of Economics, Yale University,1929) 17  - “The concept is interesting and well-formed, but in order to earn better than a 'C,' the idea must be feasible.” (Yale Professor in response to Fred Smith's paper proposing Federal Express, 1971) - “People will soon get tired of staring at a plywood box every night” (Darryl F. Zanuck, 20th Century Fox on the TV) Why the future is difficult to foretell 1. Cognitive biases We tend to ignore history and overestimate the short-term. I call it micro- myopia. Our hopes and expectations about some new technology lead us to overestimate its short-term impact on our lives and, when reality fails to live up to our expectations, our disappointment leads us to underestimate its long-term implications. When something doesn't happen in the immediate way that's expected, everyone says it's never going to happen at all. That's the point at which it takes off and blows the door off our houses. - Paul Saffo, Director, Institute for the Future, Palo Alto, LE INSTITUTE FOR THE FUTURE 2. Uncertainty Key features to define the type of environment - Complexity of the environment: related to the number of variables that affect the company. - Dynamism of the environment: how quickly or slow change these variables - Uncertainty of the environment: whether the changes are predictable or not. Some methodologies to explore the future and develop foresight A PESTEL exercise is just the first step. It provides the inputs to: 18  - Identify the major trends (or key drivers of change) that will shape the future, that is, those that are likely to have a high impact on the structure of an industry, sector or market. Those cutting across several industries or markets are called megatrends - To build scenarios to deal with uncertainty and assess the robustness of the company’s strategy Scenarios Scenarios are - Detailed and plausible views of future development of environment, based on groupings of key environmental influences and drivers of change about which there is a high level of uncertainty - Different views of possible futures - Long term view of strategy How to spot growing trends and use them to your advantage? à https://www.bcg.com/capabilities/strategy/bcg-center-sensing-mining-futureS Why build scenarios? - Disciplined method for imagining posible futures - Useful to create posible scenarios where various elements might interact - Explore the joint impact of various uncertanties - Change several variables at the same time - Allow to intepret outputs and identify patterns - Compensate tunnel vision and overconfidence Scenarios help where: - Discontinuous Change is important - Quantitative Factors are Important - You Need a Long-Term Perspective - There is High Uncertainty - There are Significant Data Gaps The Outputs Include: - A Check on Strategy - A Basis for Contingency Plans - A Means to Improve Managerial Learning The Scenario Building Process 1. Select the scope of the scenario – type of business, time span and geography 19  2. Select two key drivers of change among different PESTEL dimensions that: a. Have high-impact in the future b. Have uncertain outcomes c. And are independent 3. Create four scenarios based on opposing outcomes for the chosen change drivers 4. Develop brief scenario ‘stories’, a coherent and plausible description 5. Identify the impact of each scenario on Repsol in terms of opportunities and challenges Example: oil companies Integrating scenarios into strategic planning 20 Royal Dutch Shell and Scenario Planning "Shell scenarios work because they are neither rigid predictions nor wishful fantasies," Bentham says. “They are a way of understanding how the world looks, what forces are at work and how we can deal with them. The trick is to think in terms of trend breaks. You have to think: what radical changes could there be? That is also the most difficult part; it is not something people feel comfortable with.” Analysis of the macroenvironment: 21 SESSION 3: Looking at the industry Apple – Epic Games Apple wins a court battle with Epic Games What does Apple do in this industry? - Smartphone provider - App Store à platform business that allows you to connect end-users with game creators. Acts as a kind of distributor and intermediary. Thus, we could summarize it by saying it gives creators access to smartphone users. Let’s look at Apple’s market shares: - Computers à 16.1% - Smartphones à 21% They do not have the majority of market share in the market. Why is it then so important for Epic Games to be on App Store or for App Store to capt Epic Games. What was it all about? - On one side, Epic Games wanted Apple to open payment methods so more people could access the game. Apple only accepted Apple Pay - Apple was retaining 30% of Epic Games’ revenues As a result, Epic Games accused Apple of acting as a monopoly and refused to be on Apple devices. Why? Fortnite, one of its games, is played by 350 m people. They refused to put it on Apple as they thought they were stronger and more powerful as Apple didn’t have majority market shares in the markets. They ended up in a court battle where Apple slightly backed up as they know it would be good to attract players with games such as Fortnite. Apple won. Why? The judge ruled said it is not illegal to charge 30% and be successful. Automobile sector Why is it in constant evolution? - Energy trends changes à macroenvironment. As a result of this social transformation (go green) more and more substitutes are appearing such as bicycles and public transportation. - Production systems à technology à artificial intelligence à - Safety issued à KSF à D Competitive Advantage 22  - Regulatory measures à authorities have already said that by 2050, there cannot be active oil cars. But this obliges them to make electric cars affordable. To do that, it is important to lower costs and for now, this has not have been achieved. Apple suffers the Chinese change of era - China is producing cheaper smartphones with brands such as Huawei, Xiaomi or Samsung (not Chinese but also happening) - Why does apple still have a high market share? o Loyalty o They are not focused on the price but on differentiating their product. They follow a differentiation strategy o Lock in effect once you enter into the eco-system. Apple has evolved by digging into their competitive advantages and expanding their range of products and creating such lock-in environment. Why do some industries outperform others? As Porter says, first we want to understand how industries work and perform to: - Understand where profitability comes from - Be able to defend our position in the industry - Identify trends and changes - Know how we differentiate ourselves - Know and understand competitors - To know if we have bargaining power Essentially, to know if I should stay or I should go. The difference between market and industry analysis: - Industry à Macro analysis, looking at the forces of the macro-environment (5 Porter forces) and how they move. - Market à looking at the industry in a microscopic way, zooming in. It is composed of: o Strategic groups à the group where we compete with very similar strategy and we offer same value proposition o Strategic dimensions à we need to understand that strategic dimensions allow us to compete in an effective way. o Value propositions – customer needs à Key Success Factors (KSF) 23 Value chain comes into play when we are talking about either the company (activities that we perform) or the industry (different processes that are part of the value chain from the raw materials to the final product) analysis. How can we help a company achieve certain goals? With strategic choices. Southwest Airlines Case As we said, the first step would be defining the industry à sector that englobes a group of companies that offer the same type of products or services. Must look at: - Companies’ offer - Customer needs - Geographic area Example: Red Bull à In what industry is it? Energy drinks. Who are the competitors? Monster. Powerade is not a competitor but it could become one if they did an energy drink. if we defined the industry as a “non alcoholic beverages” it would be compete dwith soft drinks brands If we define the industry even broader, it could be “beverage”. This is possible because RB is a beverage but, if we go deeper, what is the value proposition that we are offering? Energy drinks. Depending on how we define the industry we will have a narrower view or border. Advantages and disadvantages of having a narrower view: - ADV: Focus on the specific sector. Clear picture of closest competitors - DIS: You might forget a competitor - DIS: Not representative of how the customers see the products Let’s put it into context by looking at Southwest: - Airline Industry - U.S.A Characteristics (avoid “a lot” or “low”, use numbers): 1. Low operating margins 2. Suppliers have high bargaining power 3. High fixed costs a. Labour costs b. 714 planes c. Maintenance 4. Customers are price sensitive 5. Highly Regulated 6. Barriers of entry are very low which results in large number of competitors 7. Unionized labour with power to freeze the industry (80% of employees) 8. High volume of M&A leading to big players with a lot of power à 3 big M&As mentioned in the case 24  9. Very influenced by the economic cycle 10. High risks à volatility of oil prices, which represent a 33% of their cost structure Let’s try to understand the 5 forces of Porter: 1. Threat of new entrants à the probability of new entrants coming in is very high due to low barriers of entry. What are the barriers of entry: a. Initial investment à overall we could say barriers of entry are low, which makes entering the market easier leading to high competition i. Planes à the industry has changed, buying is no longer necessary, renting and leasing is now possible, which makes it easier to enter. Still, the cost of such rent is high. ii. Airport fees iii. Storage of planes b. High regulations à this makes it harder to enter c. Equal access to distribution channels à airport slots à not easy to get as big companies have agreements with airports. d. Switching costs are low which makes it easier to enter e. High economies of scale à easier to enter f. Difficult to innovate which reduces barriers to entry g. Shortage of pilots who prefer to stay at big companies à high barrier of entry h. Increase in demand makes it easier to enter i. Brand loyalty is low which reduces barrier to enter 2. Substitutes à Considering the following: a. Southwest routes are short b. Price / benefit c. Southwest’s hub is in Houston. It flied to Dallas and San Francisco. It takes you 1h 30’ to do the 361 Km. d. Infrastructure of planes is very bad e. By car it would take 3h 30’ f. No public transport for such long routes We can identify that the potential substitutes (cars, trains, buses) have low strength specially because of the price of the plane tickets and length of trip. 3. Suppliers’ bargaining power à Who are the suppliers? Looking at the following we can say they have high power a. Airplane manufacturers such as Boeing, Airbus or Bombardier. Do they have high bargaining power? 25  i. Their industry is more concentrated which means they have more power ii. Boeing sole supplier iii. High switching costs as you have to train pilots again, maintenance, administrative costs (contracts and negotiation). b. Airport slots à high power as much demand and little offer c. Oil companies à essential for the company so high power d. Crew / pilots à unionized with high power 4. Customers’ bargaining power à Knowing the following we can say they have high power a. Price sensitive customers à this leads to lower prices b. Low switching costs à more power c. No loyalty à more power d. Undifferentiated service à no difference perceived 5. Rivalry a. A lot of competitors at route and price level (DATA!) b. Sector is concentrated due to M&A activity c. Exit difficulties which makes rivalry higher as if you have to stay you will want to reduce costs and prices Final assessment: unattractive industry - Low barriers of entry and suppliers and clients have high bargaining power - Low cost structure is key for success - Undifferentiated service - Very sensible to economic cycle - Low margins - Tends to have price wars Competitive advantages of Southwest: - Culture generates customer loyalty - Maintenance 737 à low operating costs - Popular routes Key learnings: - Five Forces of Porter allows us to understand the structure underpinning profitability, which allows you to decide whether it is attractive or unattractive for you o Ex. Southwest was determined to be an unattractive industry considering there was a price competition. Why? 26  § Undifferentiated product § Price sensitive customers § Low switching costs § Same value proposition à zero-sum competition Southwest value proposition à Direct flights, short routes, low prices, good customer service, convenience. What’s the competitive advantage? Not a competitive advantage in itself because they don’t differentiate themselves. Their true competitive advantage is the culture of the company, which leads to their employees being more loyal and thus more efficient and productive, leading to cost efficiency. Such efficiency is very important because we are competing in a market where operational efficiency is key to be able to keep prices low. Thus, their strategy is cost leadership or operational excellence. § Concentration of players (due to M&A) § High fixed-costs à low operating margin How can a company sustain their competitive advantage? Let’s look at Southwest. - It is very difficult as it is constantly growing - The CEO is the one that spread the culture and accomplished spreading it amongst employees, leading to their motivation à loyalty à efficiency à cost leadership. Thus, if the CEO changes, the culture will probably weaken or change, which will make it difficult to sustain their competitive advantage. Is Southwest following a hybrid strategy (mix of cost efficiency and differentiation) or just cost efficiency? - Differentiation à the great and easy-going customer service and the culture of motivation, loyalty and teamwork in the company. - Cost efficiency à thanks to the motivation of employees, they are more productive, increasing efficiency and lowering costs, which allows them to charge lower prices. 27 SESSION 4: Types of strategy “The next Big Tech battle: Amazon’s bet on healthcare begins to take shape” “The ecommerce company is developing services for consumers and hospitals but faces competition from Google, Microsoft and Walmart” Amazon is so diversified that they have to create business units à relevant because each unit competes in a specific market and requires a specific strategy. What are the benefits of having different business units? - Differentiation - Profitable growth without trade-offs - Reduce risk as not all eggs in the same basket but it is still risky as you enter new markets without experience or capabilities - Synergies can be achieved. Could also lead to vertical integration (buying the company prior/next to you in the value chain) - Accountability of each business unit by one of the employees, which leads to higher productivity Identifying Strategic Business Units A strategic business unit is a part of an organisation for which there is a distinct external market for goods or services that is different from another SBU. Effects of SBUs on corporations - Decentralization - Variety of business strategies - Accountability Criteria for identifying SBUs Identifying boundaries is often complex… Which are the factors that differentiate them? - Market-based or - Capabilities-based 28 An example: Unilever Why in any industry some companies are more profitable than others? Apple vs. Samsung How do we calculate profitability? - Revenues – Costs - Ratios à ROE, ROI, ROA - Margins - Bottom line - Growing market share Profitability has to do with competitive advantage. Competitive Advantage How an SBU creates unique value for its users both greater than the costs of supplying them and superior to that of rival SBUs. Some ideas: - Comparative term à better than competitors - Creation of unique value greater than costs - Form of being different - innovation - Characteristic / factor / attribute Generic Strategies How many Porter Generic Strategies are there? 1. Differentiation 2. Cost Leadership 3. Focus 4. Hybrid 29 Differentiation Differentiation à not only is it needed to be unique but also that the customer perceives this so he/she is willing to pay a premium price. Differentiation involves uniqueness along some dimension that is sufficiently valued by customers to allow a price premium. Where can this uniqueness come from? Most of the factors are strategic dimensions. 1. Quality 2. Innovation 3. Exclusiveness 4. Design 5. Brand Image (quality and others taken for granted) Why do we need to differentiate? In a supermarket the average inventory is of 40.000 products to cover 85% of the costume needs. Are products ignored? Each product has its audience, its market. “Tim Cook tries to reduce Apple’s dependence on devices and increase its revenues from services” Due to being in a mature market, it has become very difficult to differentiate as it is now more of the same, boring, people upgrade less frequently and sales are stagnated. - Problem: eye-watering process for aspirational, frequently replaced devices - New services: store for video games, video streaming, to undercut rivals The differentiation strategy - Is gained by a company when it has a characteristic that is better than its competitors’ and when this is perceived and appreciated by the customer. - This company obtains exclusivity. o Many ways of achieving differentiation o Some of them applicable only to certain industries o Every day companies try to find new ways 30  - Few examples of the most usual ways of obtaining this competitive advantage: o Quality o Innovation o Design o Technology or know-how o Service o Channel o Brand image Differentiation Economics If products / services are unique in ways that customers value, and costs are under control, premium prices can be charged that lead to higher profitability. What are the underlying sources of differentiation? - Don’t forget that customers “hire a product” to do a job for them - Every job has a functional, a social and an emotional dimension Understanding differentiation: 1. Product features a. Product wins because it does a better job b. Product wins because it does more jobs c. Product does a unique job 2. Superior quality or reliability 3. Convenience a. Convenient to find and purchase b. One-stop shop 4. Brand image a. Luxury brands emphasize social and emotional dimensions b. Central is customer perception not technical features The key drivers of differentiation are: - Product and service attributes à providing better or unique features (e.g. Apple or Dyson) - Customer relationships à customer service and responsiveness (e.g. Zalando); customisation (e.g. SAP) or marketing and reputation. E.g. Apple Store to be closer to customers which allows you to build loyalty and gather information and feedback. - Complements à building on linkages with other products / services (Apple and iTunes) 31 Risks involved in differentiation: - Higher costs - Customers might become price sensitive - Customers may no longer need differentiation factor - Imitation by competitors - Change of customer’s tastes Cost Leadership Strategy Cost Leadership Strategy involves becoming the lowest-cost organization in a domain of activity. Four key drivers: 1. Lower input costs 2. Economies of scale to achieve a lower average cost 3. Curve experience 4. Product / process design The main point of cost leadership is not a specific attribute or characteristic but offering standardized products, this means the product can be basic and low quality but still fulfils the need. Drivers of a cost advantage: Economies of scale and the experience curve 32 Understanding cost advantage A different business model - Eliminate activities in the value chain. E.g. Ryanair - Perform different activities. E.g. Amazon Which factors are more likely to yield a sustainable cost advantage? Low cost should not be pursued in total disregard for quality. Businesses have two options here: - Parity – equivalent quality in terms of product or service features. The cost leader can then charge the same price as rivals and make higher profits. - Proximity – only slightly lower quality allows the cost leader to offer a slightly lower price and still make higher profits. To sustain this competitive advantage you need to have the lowest cost structure, which will allow to charge a low price. And how can you do that? With economies of scale. Risks involved in cost leadership - Easy to imitate - Technology improvement may lead competitors to leapfrog production capabilities and eliminate the competitive advantage - Price wars - Difficulty in sustaining cost leadership in the long run How do we observe competitive advantage? Porter’s competitive positioning Focus Strategy A Focus Strategy 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. The narrowing can be done through: - Geography - Based-needs 33 Two variants: - Cost focus à identify areas where broader cost-based strategies fail because of the added costs of trying to satisfy a wide range of needs o Ex. Macro vs. a simple cost leadership strategy done by Seat, Toyota Dacia - Differentiation focus à look for specific needs that broader differentiators do not serve well. o Ex. Tesla, Smart, Ferrari, Lamborghini vs. a simple differentiation strategy done by Audi Going through Passeig de Gràcia 1. Identify 20-30 shops / companies 2. Identify their generic strategies 3. Try to find at least 1 example of each strategy 4. If possible try to group them based on their value proposition / attributes COST COMP. ADV. DIFF. COMP. ADV. Cost-leadership Differentiation BROAD SCOPE Mango, Zara, Uniqlo Nespresso, Nike, Tous - Fashion at affordable prices - Quality - Cost structure à turnover à economies of - Exclusivity (own shop) scale - Experience 34  Differentiation Focus Differentiation Focus Macro Rolex, Fendi, Chanel, Eco-Alf NARROW SCOPE - Specific target = wants to buy in bulks, go there, get a Macro Card - Quality - Low costs - Exclusivity (own shop) - Low margins - Experience - Standard products - High price not many can afford = very specific target segment - Eco-friendly customers = very specific target segment 35 SESSION 5: Alternative Competitive Advantage The Strategy Clock Bowman and Faulkner talk about hybrid strategies, while Porter would say you are “stuck in the middle”. If I decide to compete with different strategies (differentiation, cost leadership, focus), the most important thing to do to avoid damaging our reputation is: - Segmentation - Understand the needs - New brand images o Brand 1 à Differentiation o Brand 2 à Cost leadership o Brand 3 à Focus New approaches to strategy & differentiation To succeed and have superior profitability - Be better than your competitors (in the same market space) à “Classic” approach to business strategy à red ocean strategy - Avoid direct competition (by creating new spaces) à “Different” approach to Business Strategy e.g. Cirque du Soleil, Starbucks, Netjets, Hilti à blue ocean strategy Blue Ocean Strategy “Break out of the red ocean of bloody competition by creating uncontested market space that makes the competition irrelevant” - Industries not in existence today - Untapped market demand - Unknown market space 36 Red Ocean vs. Blue Ocean Strategies Red Ocean Strategy Blue Ocean Strategy - Compete in existing market space - Create uncontested market space - Beat the competition - Make the competition irrelevant à if you are the first - Exploit existing demand mover, you can win all market share or a majority - Make the value-cost trade-off stake thanks to loyalty, creating a monopoly, gaining - Align the whole system of a firm’s economies of scale, achieving brand awareness, activities with its strategic choice of market power and the curve of experience differentiation or low cost (competitive advantage). So by the time other try to enter, we will already have created barriers to enter. - Create and capture new demand - Break the value-cost trade-off à thanks to economies of scale you can have a low cost strategy and can also invest in differentiation - Align the whole system of a firm’s activities in pursuit of differentiation and low cost An alternative view of competitive advantage In order to achieve a competitive advantage you can play with three axis – threshold vs. leadership in costumer value 1. Product leadership (best product) à product differentiation 2. Operational excellence (best total cost) à operational competence 3. Customer intimacy (best total solution) à customer responsive Why do your customers choose you over every other competitor in the market? 1. PROCESS (ie Motel 6: clean, comfortable rooms and the lowest price, INDITEX, IKEA) a. Operational excellence b. Competition by constantly pushing the limits on efficiency c. Standardized and centralized operations d. Tough penalties to eliminate waste e. I.e. cheaper, more convenient, more efficient 2. PRODUCT (ie BMW, making engineering #1, W hotels a storybook of style) a. Product leader b. Superior features of the product offer best product available c. Industry, style features, speed, invention, innovation, new market explotarion, many experiments needed d. Loose, flexible, fluid, organizational structure, e. Flexibility to adapt quickly to new product initiative f. IE: better tech, more features, cooler style, superior quality 37  3. CUSTOMER (ie Nordstrom, Ritz Carlton: care and comfort) a. Customer intimacy: outstanding service, providing the best tailor solution ta customer needs b. Anticipate the needs of each carefully selected customer: life-long boud with customer. Give the customer what they want. c. Delegation and decentralization d. Information system to track preferences Difficult to do all of them. Veritas Case Study 1. Assess Veritas' financial performance from inception and link it to its strategic positioning over time. IMPORTANT to use exhibits! Milestones: - Idea in 1996 à by Elías (Caprabo) à Holland, supermarket chain, organic products - Started talking to others in 2000 - Foundation in 2002 - Profitable in 2009 - Expansion in Financial performance: - 2005 à growth rates 15 – 25% - 2009 à PM6 (-) o L-T buying commitments o Buying patterns à at that moment in Spain there was not a market for organic food o Hippies à organic-real à it was more of an activist movement - How did they change this? o Relationships with stakeholders: § Suppliers § Customers à they educated customers and raised awareness about the benefits of organic foods creating a market for organic food - Their strategic positioning changed and they achieved positive profit margin in 2010 - New market trends: private label à certified - 2015 à higher profit margin 7.5% 38 - 2011 – 2015 à increasing competition à margins decrease - Growth ROA vs. ROE o ROA à use of assets to generate returns, Veritas is better than competitors, nice advantage o ROE à Vergel has a very high ROE 2. Assess the competitive dynamics of the organic food retailing sector in 2015. Substitutes o Fresh non-organic food from supermarkets (products out-of-season and full shelves) New entrants o Barriers to entry: relationships with local suppliers, stores, training employees o Economies of scale: to have them, they need a certain size = will decrease the threat of new entrants o 94% growth since 2010, more supermarkets, fierce competition but in 2015 growth did slow down o Capital requirements: depends on whether you want to enter on-line (easier to enter) or physical / brick and morter (300K, which are only recouped after 2-4 years) o Wide range of products; Vergel (catering, restaurant and take-away) o Private labels (Corte Inglés, Aldi, carrefour) o Veritas was working with 3.000 SKU → easy access → range → season based o Eroski’s partnership = easier geographical expansion + broader population (bigger retailer) Suppliers’ bargaining power o High: firms can choose among local suppliers only o Depends on agreement about price and bad harvests o Certification needed gives more bargaining power → you are giving more quality products o Local suppliers (proximity) = health + proximity + KM0 + local economy o Special relationship → long-term contracts (win-win situation) Consumers’ power o Low: consumer is an educated adult (segment, big investment by veritas) (not an activist anymore) willing to pay a higher price due to being aware of quality, health benefits, being chemical-free and environmentally friendly à less price sensitive o They have switching cost (they can move from organic to non-organic products) Rivalry 39  o Intense and diverse competition: from international organic supermarket to local chains (3-5 stores) à not only specialized stores are focusing on organic products o Specialized stores were turning into supermarket chains o M&A activity between players to gain market share 3. What strategic capabilities does Veritas have? - Formation of local partnerships that give access to a wide range of products. - Flat organizational structure, reducing bureaucracy and leading to faster decision- making process and fluent communication. - Constant feedback and strong connection with customers channelled through well- educated personnel and strong media offering (app, social networks). - Veritas’ best-selling product (Baked Bread) is self-produced in Barcelona, which leads to cost reduction using vertical integration. - B Corp certification - Trained employees à contact with customers à education customers - Cost efficiency thanks to less intermediaries = higher margins - Mobile APP: magazine 4. Can these strategic capabilities contribute to creating a competitive advantage? If so, how? These capabilities give Veritas an edge over its competitors. Veritas presents a strong competitive advantage in the following aspects: - Full range of products for a competitive price provided thanks to the company’s local partnerships and efficient structure. This gives Veritas an advantage over specialty stores which offer only a fragment of the product range and places it outside the “organic food activists” niche. - Better positioning than standard and organic supermarket chains stemming from the strong customer-brand connection created in addition to satisfying customers’ demands. Educated personnel that customers interact with and a strong digital offering are the key elements of such connection. - Ability to quickly adapt to the customers’ needs, constantly making changes and introducing new products. Information to do so extracted from the high volume of feedback encouraged by staff and provided by the engaged customers to personnel and also through digital channels. 40  5. Should Veritas expand into Madrid by opening a new store or by partnering with Eroski? Partnering with Eroski - Advantages: Would speed Verita’s growth pace without requiring additional investments. Less risky, investment is lower, brand awareness is already present and powerful in Catalonia. - Disadvantages: Consumers might misunderstand it as Eroski’s organic brand. Slower strategy entrance in the capital’s market and lower brand awareness. Opening a new store - Advantages: Would help Verita’s expansion leading to higher recognition and fast strategy implementation. Gain brand awareness, staying close to the customers (allows to keep on educating), avoiding misconceptions, larger variety of products, gain autonomy (power of brand). - Disadvantages: Risk and uncertainty on whether the company would be able to replicate this plan having peaking competitor’s openings in Madrid. Requirement of 300.000€ and would take between 2-4 years for a return. Considering implied costs, competitor’s threats and the risk assumed, it would be advisable to partner with Eroski to ensure future geographical diversification. 41 SESSION 6: Casa Ametller vs. Veritas What is the value proposition of Casa Ametller? - Customers: good quality product à knowing its origin - In the origins à vertical integration to eb able to inform customers of origin - On-line sales à process more product à 1500 orders - Revenue growth: o 162 Mn in 217 o 370 Mn in 2020 - More revenue streams: o Restaurants à try products and then buy them o Nutritional advice o Chef cooking in supermarkets - High presence in social media (Instagram) à exposure à brands awareness à powerful image (big % of costs) - Distribution of store à market place à attractive - Partnership with Bonpreu à more exposure - Focusing on zero emissions and healthy products - Family business (eight generation) à origins: land What is the value proposition of Veritas? - Partnership with Eroski - Focusing on organic food If they offer different value propositions (healthy vs. organic) why is CA eating up V’s market share? - Customers who want organic food also want healthy food - Even though Veritas has worked to educate customers about what it means to produce organic food, CA’s brand image investment has accomplished confusing customers about its products being organic and sustainable just because of them being healthy. As a consequence: o V is losing customer to CA, which, to the public, offers both healthy and organic products. - There is a gap between the ability to bring new things (V bringing organic food) and the public building knowledge about such benefits. What is the risk for Ametller? That at some point in time customers will become aware about the products not being organic or as healthy as they thought, which will make them leave to other brands. This is what happens when firms are not fully transparent. 42 How should veritas respond? - Strategic dimensions à competitive advantage à key success factors (KSF) which are what our customers want - Advice / educate customers about the concepts of health and organic - Being more active in social media - Is organic still connected to “hippies activists”? They could go back to that image - Redesign store distribution - Recycling (as Amettler) à give rewards and clients will come back - Raise exposure of environmentally-friendly practices (carbo footprint reduction) by communicating - Promotion campaign that shows that you can’t be sustainable if you are that big à open the customers’ eyes - Expand on-line sales Competitors and Markets wrap-up - 5 Forces of Porter à why are some companies more profitable than others? - How do we compete against each other? - Need to understand the strategic dimensions that that allow us to compete and also satisfy customer needs. From the latter, we can develop two concepts: o Key success factor that can turn into a competitive advantage o Minimum success factors à minimum needed to compete - If we do this well, the strategic dimensions can act as mobility barriers - Strategic groups à similar strategies / came customer needs à allow us to understand who we are competing against the most. We can build strategic group maps to understand who we are competing against. The important thing is to identify the strategic dimension of each of the groups of the map. Key Questions in Competitive Strategy 1. Where to compete a. Macro environment analysis (PESTEL & Scenarios) b. Industry analysis (Porter’s 5 Forces) 2. How to compete a. Generic Competitive Strategies: Cost leadership, differentiation & focus b. Strategic groups, market & competitor analyses, KSFs 3. What strategic resources do we have? a. Resources & Capabilities (VRIO) b. Strategic Factor Markets c. Dynamic Capabilities 4. What strategic resources do we need? 5. How do we change? 43 SESSION 7: Resources and Capabilities Introduction We not only have to understand the industry, also the firms themselves. What is the firm effect? The Million $ Question: If Profitability Doesn’t Come Automatically From Your Industry, Then How Can You Achieve Above Average Profits on a Regular Basis? Kenichi Ohmae summarizes it as the strategic triangle: Industry-market-company. - The industry tells us about the situation of the competitors (with regard to the company). - The market tells us about customers’ demands. - And the inside of the company must tell us about the necessary resources and capabilities. Creating Strategic Fit to Leverage Internal Strengths 44 The Resource-based View (RBV) of the Firm - Pioneered by Edith Penrose and developed by Barney, Wernerfelt, Quinn, Grant, and Hamel & Prahalad - The KEY lies in the firm’s resources and capabilities because competitive advantage (and superior profitability) derives from the distinctiveness of the organisation’s resources and capabilities - In a turbulent environment, resources and capabilities provide a much more stable basis on which to formulate strategy o Jay Barney explains the main insight of the RBV theory: https://www.youtube.com/watch?v=-KN81_oYl1s Key assumptions of the RBV: - Resource heterogeneity: resource endowments differ among firms - Imperfect resource mobility: imperfectly mobile resources are non-tradable or less valuable to other users and cannot be taken away from the firm - Ex-post limits to competition: ‘isolating mechanisms’ to protect valuable resources - Ex-ante limits to competition: avoiding to overpay for valuable resources In the Football League graph we can see: - Leaders: Barça and Madrid - Consistency - New comer challenging the leader’s position - Distinguish strategic groups: o Upper level o Medium / Low level à volatile - If you perform badly, you move down to 2ª division o Leaders have never moved down à what was the most important resource for Barça? Messi, as he was very good at scoring + asistencias à thus in order to perform and gain a competitive advantage, you have to have strong resources. Resources & Capabilities It is important to distinguish between the resources and the capabilities of the firm: ̶ - Resources are the productive assets owned by the firm (What we have) - Capabilities refer to the organizational and managerial skills that a company uses to organize and deploy its resources (what we do well) Individual resources do not confer competitive advantage, they must work together to create organizational capability. The essence of superior performance lies in the nature of the firm’s resources and capabilities 45 What is a resource? Resources are the productive assets owned by the firm. Everything that the firm has, is considered the resources of the firm and can explain why the firm is performance in a concrete way. Types: - Tangible - Intangible: reputation, personal brand - Human: skills, the best (rare) The dynamic interplay of three fundamental market forces determines the value of a resource (Source: Colls and Montgomery, Corporate Strategy – 1996) - Scarce à unique - Appropriability à if human, it involves the willingness of the person to stay + the cláusula or contract - Demand à everyone wants it but only one can have it Are resources efficient or sustainable? à need to find ways to renew it and change it, durability is very important What happens with the same key resource in a different context? - Ex. Messi in PSG vs. Barça vs. Argentina - It might lose value à he has not scored yet - It depends on how we use those resources, and whether we are able to use them effectively Capabilities: the way those assets are used well or deployed effectively. The outcome of the cooperation and coordination of resources, the result of how the organization uses and organizes these resources. It has to do with the efficiency and effectiveness of physical, financial, human and intellectual resources, how they are managed and how people cooperate between them. Competences are “what we do well”. Long-term survival and competitive advantage: 46  Resource Characteristic Indicators Tangible Financial Borrowing capacity Debt/Equity ratio Internal funds generation Credit rating Net cash flow Physical Plant and equipment: size, location, Market value of fixed assets technology flexibility. Scale of plants Land and buildings Alternative uses for fixed Raw materials assets Intangible Technology Patent, copyrights, know how, R&D Nº of patents owned facilities Royalty income Technical and scientific employees R&D expenditure R&D staff Reputation Brands, Customer loyalty, company Brand equity reputation (with suppliers, customers, Customer satisfaction government) Supplier loyalty Human Training, experience, adaptability, Employee qualifications, commitment and loyalty of employees pay rates. turnover Functional Area Capability Exemplars Financial control Exxon Mobil, PepsiCo Management development General Electric, Shell Strategic innovation Google, Haier Corporate Functions Multidivisional coordination Unilever, Shell Acquisition management Cisco Systems, Luxottica International management Shell, Banco Santander CSR Johnson & Johnson, Danone Information Integration of IT with decision making Wal-Mart, Capital One, Cemex Management Research capability IBM, Merck Research & New porduct development Apple, 3M Development Fast-cycle new product development Canon, Inditex (Zara) Operational efficiency Briggs & Stratton, UPS Operations Continuous improvement Toyota, Wal-Mart Flexibility and speed of response Four Seasons Hotels Design Product design capability Apple, Alessi Brand management Procter & Gamble, Altria Marketing Building reputation for quality Johnson & Johnson Responding to customer requirementes L’Oreal, Amazon Dynamic capabilities Strategic capabilities cannot be static, they have to change, if they are supposed to provide with long-term success. David Teece has introduced the concept of dynamic capabilities, suggesting that the organization has to have the ability to renew and recreate its strategic capabilities to meet the needs of changing environments. Must pay attention to industry / changes in customer needs (PESTEL and 5 Forces analysis). He argues that the capabilities that are necessary for efficient operations, like owning certain tangible assets, controlling costs, maintaining quality, optimising inventories etc., are unlikely to 47 be sufficient to sustain superior performance. There is no such thing as a sustainable competitive advantage. Capabilities that were the basis of competitive success can over time be imitated by competitors, become common practice in an industry or become redundant as its environment changes. They are dynamic in the sense that they can create, extend or modify an organization’s existing operational capabilities. A dynamic capability is a strategic process or routine that allows us to reconfigure resources as market / industry / environment changes Three generic type of dynamic capabilities: 1. Sensing: organizations must constantly scan, search and explore opportunities across various markets and technologies. Research, development, and investigating customer needs are typical sensing activities 2. Seizing: once an opportunity is sensed, it must be seized and addressed through new products or services, processes, activities, etc. 3. Reconfiguring: to seize an opportunity may require renewal and reconfiguration of organizational capabilities and investment in technologies, manufacturing, markets, etc. Threshold capabilities Those essential to compete in a specific market. They are required to be in the game. Related to the Minimum Success Factors à MSF Threshold levels change over time due to - Changes in KSFs - New entrants - Competitor activity Trade-offs to achieve threshold capability for different customers (market segments) - High volumes of standard products versus high value specialities Complementarity of resources and capabilities - Can be difficult to dispose of 48 Distinctive capabilities Required to achieve a competitive advantage. Related to the Key Success Factors à KSF. These are dependent on an organization having distinct or unique capabilities that are of value to customers and which competitors find difficult to imitate. This could be because the organization has distinctive resources that critically underpin competitive advantage and that others cannot imitate or obtain – a long-established brand for example. Key Result Areas (KRAs) Areas responsible for carrying out a company’s strategy, those that devise and are responsible for its strategic dimensions. There are seldom many key areas in the company, but usually we will find 2 or 3 areas. Only those areas that are responsible for achieving the strategic dimensions that define the firm’s strategy are KRAs. Its KRAs must perform at least as well as those of its competitors, if not better. However, a company can afford to be less than outstanding in the remaining areas, those that are not KRAs. No company can afford to have poorly performing KRAs. Given that all organizations have limited resources, it would be advisable to focus on those aspects that are basic for their success. The organization should concentrate its efforts and its relatively scarce resources on the areas that will bring it maximum benefits, as it is these that will have most influence on the factors that the market will value most. How do we asses our resources and capabilities? Common barriers to imitate valuable resources & capabilities from competitors: - Legal means o IP rights - Path dependence o History matters - Causal ambiguity o Where does a firm’s advantage come from? - Social complexity o Resources reside int eh complex relationships between systems, departments and people within an organization The VRIO Framework Distinctive resources and capabilities are necessary for sustainable competitive advantage and superior economic performance. We can use four key criteria to identify where we can achieve a competitive advantage: 49 - Value: strategic capabilities are valuable when they create a product or service that is of value to customers and if, and only if, they generate higher value or lower costs or both. o Value to customers: ability to deliver what the customer values. Sometimes we forget or misunderstand the value. Managers may seek to build on capabilities that they may see as valuable but which do not meet customers’ critical success factors. o Taking advantage of opportunities and neutralizing threats: capabilities need to provide the potential to address the opportunities and threats that arise in the organisation’s environment, which points to an important complementarity with the external environment of an organization. o Cost: the cost of acquiring capabilities or resources should be reasonable. - Rarity: unique resources, rare competences o Who owns the competence and how easily transferable is it? o Preferred access to customers / suppliers o Situation dependent / non-transferable o Danger of becoming core rigidities § Difficult to change § Can lead to strategic drift - Inimitability: R&C that competitors find difficult or costly to obtain to substitute. The criteria for the inimitability of the capabilities are: o Complexity (e.g. internal linkages or external interconnectedness) o Culture and history (e.g. path dependency) o Causal ambiguity (difficult to discern / capture – linkage or characteristic) - Organizational support: the organization must be suitably organized to support the capabilities that lead to competitive advantage 50 Appraising strategic importance or resources and capabilities decision tree Framework for appraising RR&CC Strategy Implications Resource trade-offs - The value of resource is dependent on other resources in a firm’s portfolio - Different capabilities maximize payoffs from different kinds of resources Fit and Stretch & the SWOT Analysis - External environment: Opportunities and threats - Internal strategic capability: Strengths and weaknesses Matching strategic capabilities to opportunities in environment à Strategic fit or Leveraging strategic capabilities for competitive advantage à Strategic stretch Best way to do this à SWOT Analysis 51 SWOT Analysis 1. Strengths a. Advantages b. Capabilities c. Resources, Assets, People d. Marketing – reach, distribution 2. Weaknesses a. Lack of competitive strength b. Financials c. Our vulnerabilities d. Timescales, deadlines and pressures e. Continuity, supply chain robustness 3. Opportunities a. Market developments b. Business and product development 4. Threats a. Environmental effects b. Market demand c. Obstacles Amazon Go Case What does Amazon do better in on-line segment? - First mover à Brand awareness / loyalty à people already trust you when launching new customers o Changed customers purchase habits - Innovative markets à free media coverage o Marketing online - Efficiency in supply chain management à quicker and wider range o Better prices à economies of scale + experience curve - Manage information thanks to having huge data bases - Innovation capabilities - Customer-centricity - Purchase experience is very well reviewed and rated à customer satisfaction Which strategic assets do we need to succeed in offline? - Cost efficiency - Strategic locations of physical stores 52  - Suppliers relationship à partnership - Wide variety of products - Convenience within the store à manage stores efficiently - Building brand image (advertising) o Perceived different - Investment in R&D - Customer service à depends on strategy (differentiation / cost efficiency) - Need knowledge of the industry to enter and be successful Can Amazon leapfrog their competitors? - What we lack o Experience o Brand awareness o Big investment in physical stores o Alignment between what we offer and what the customer wants à only temporary as Amazon is looking at a Niche focus à hybrid? § High quality products § Affordable prices à economies of scale o Experience in the segment o Partnerships o R&D capabilities offline - What we have o Large customer base that could be potential customers o High customer satisfaction online à loyal o Innovative marketing o Private labels à lower costs o Technology innovative How do we acquire resources? 1. Develop (invest) à training / building from scratch 2. Partner with others that have knowledge / stores a. Purchase from outside b. Hire people from industry 3. Make irrelevant and change rules of game Competitor’s analysis: - Walmart o Curve of experience à solid knowledge o Overall preserve in USA o Low prices 53  o Private labels o Wide range of products - Amazon Go o City / Urban areas § Working people § Time to shop § Young people § Convenience § Quality Can Amazon sustain its competitive advantage of technology? Issues: - Competitors can imitate technology - Compatibility with devices - Depreciation of technology - Customers may not know how to use it - Technology (MSF) they might get bored - The customer might not be ready for it à customers might be afraid of scans VIP o Mobile payments à in the USA they usually pay with cash / credit card / cheques How to “Make irrelevant and change rules of game” - Knowledge à in order to build your brand if you start off by knowledge it will take more time - Acquiring supermarket à if you buy a chain you already have the knowledge and brand name and locations à what they did is buying Whole Foods (organic products). Resources and capabilities are not necessarily transferable which is why we need to think how to manage them whether we want to use them in new venture and whether we need to reconfigure them 54 SESSION 8: Developing RR&CC How do firms develop resources that matter? The dynamic interplay of three fundamental market forces determines the value of a resource (Source: Colls and Montgomery, Corporate Strategy – 1996) - Scarce à unique - Appropriability à if human, it involves the willingness of the person to stay + the cláusula or contract - Demand à everyone wants it but only one can have it Understanding Dynamic Capabilities How do firms respond to change in the market place? “The firm’s processes that use resources – specifically the processes to integrate, reconfigure, gain and release resources – to match and even create market change. Dynamic capabilities thus are the organizational and strategic routines by which firms achieve new resource configurations as markets emerge, collide, split, evolve, and die”. Teece et al. (1997) - Dynamic capabilities are unique ("signature processes“) - Often tied to original business models and practices o Difficult to imitate (culture, history, path dependency) 55  - Dynamic capabilities can create, extend, modify the existing capabilities of an organization - Three types of dynamic capabilities: o Sensing: scan, search, explore across markets/technologies (e.g. R&D, customer needs). Reaction to market needs. Understand organization’s position o Seizing: developing products/services Making strategic choices o Reconfiguring: renewal and reconfiguration of capabilities. Enacting strategies - There are exploration/exploitation trade-offs Some examples of Dynamic Capabilities Mobile telephone companies - Telecom & radio capabilities - Mid 1980s to late 1990s - Design & consumer behaviour capabilities - Late 1990s-early 2000s - Design, interface, consumer behaviour and new mobile phone consumer behaviour capabilities - Late 2000s - Latent need for smaller mp3 players Development of the iPod and iTunes. Shift in focus from computers to consumer electronics at large. Renewing company processes 56 Strategic factor markets: How do we acquire resources - How firms underpay for resources? - How firms overpay for resources? It’s all about superior expectations. How do firms improve their foresight? - Carefully explore the environment for information, any type – ‘serendipity’ - Scenario planning - Interdisciplinary teams – ‘the Medici effect’ - Communication channels within the firm Reminder: A caveat - Capabilities, however effective in the past, can become less relevant as industries evolve and change. o Such ‘capabilities’ can become ‘rigidities’ that inhibit change and become a weakness. Ex: DELL Some tools to sense market and technological opportunities Disinvestment and common problems with resource divesture - Cognitive biases – E.g. anchoring and loss aversion - Corporate politics 57  - Inertia Firms need to constantly evaluate their resource portfolio and update it based on their evolving strategy Motorola Case Arming Android – August 2011 SHOCK. Bombshell. Incredible. Even seasoned observers of the technology industry could not hide their surprise when it was announced on Monday, August 15th, that Google, the online giant, would buy Motorola Mobility, a maker of handsets and other electronic devices, for a whopping $12.5 billion. The deal not only comes as a surprise, it will have a big impact on the mobile industry, too. For starters, the merger is very good news for the shareholders of Motorola Mobility, among them Carl Icahn, the activist investor. The offer—$40 a share in cash—is 63% above the closing price of Motorola Mobility's shares on Friday. It is unlikely that shareholders would have got such a price on the open market any time soon. Although Motorola Mobility, which was only spun-off from Motorola in January, has staged something of a turnaround, it is still too small to compete with much bigger rivals such as Apple, Nokia and Samsung. Since March its shares had been trading below their issue price of $25. As for Google, although it will spend about one third of its cash on the biggest acquisition in its 13-year history, it will also get a lot: plenty of ammunition in the ongoing battle between mobile platforms. Android, Google's operating system for smartphones and other mobile devices, has taken the world by storm. In America it now powers nearly 40% of new smartphones, outdoing the platforms of Apple and RIM, the