My Notes PDF

1) WHAT IS STRATEGY? Strategy involves differentiating from competitors to maintain a competitive edge. Imagine you are running a fancy 5-star hotel, and there are four other similar hotels nearby. You might think you can charge really high prices because you offer top-notch service. But here is the...

1) WHAT IS STRATEGY? Strategy involves differentiating from competitors to maintain a competitive edge. Imagine you are running a fancy 5-star hotel, and there are four other similar hotels nearby. You might think you can charge really high prices because you offer top-notch service. But here is the deal – you cannot always charge sky-high prices because everyone else is also in the game. The competition keeps things balanced, and prices tend to settle at a reasonable level. Because the market is efficient and you cannot beat the market, there is a trend to the average. So, instead of just playing the price game, the smart move is to stand out from the competition. You want to be the hotel that people choose not just because it is expensive but because it offers something special. Maybe it is amazing service, unique experiences, or something else that makes you different. That is how you win in a competitive market. Michael Porter is renowned as the father of strategy, emphasizing that “THE ESSENCE OF STRATEGY IS CHOOSING WHAT NOT TO DO.” 2) CORRELATION BETWEEN ECONOMIC CYCLE AND PORTER FIVE FORCES MODEL a) INDUSTRY LIFE CYCLE The industry life cycle consists of several distinct stages, each characterized by different market dynamics, growth rates, and challenges. Although the number and names of these stages may vary slightly depending on different models, generally the industry life cycle consists of the following stages: 1. Introduction Stage: This is the initial stage when a new product or technology is introduced to the market. The market is relatively small, and customer awareness and acceptance are low. Companies face high costs due to research and development, marketing, and building distribution networks. Profits are typically low or negative in this stage. 2. Growth Stage: In this stage, customer awareness and acceptance of the product increase, leading to rapid market expansion. Sales and market share grow, and competition intensifies. Companies focus on product differentiation, increasing market penetration, and building brand loyalty. Profits start to improve, and economies of scale may be realized. 3. Maturity Stage: The market reaches its saturation point in the maturity stage. Growth rates slow down as most potential customers already use the product. Competition becomes fierce, and companies focus on defending market share, improving efficiency, and reducing costs. Price competition intensifies, and there is a greater emphasis on marketing and customer service to maintain existing customers. 4. Decline Stage: In this stage, the market for the product starts shrinking due to various factors such as changing customer preferences, technological advancements, or market saturation. Sales decline, and companies may divest or discontinue products. Competition decreases as weaker players exit the market. Companies that remain may focus on harvesting profits, cost reduction, or identifying niche markets. It is important to note that not all industries follow the same life cycle pattern, and the duration of each stage can vary significantly. Additionally, industries can experience cycles of renewal or transformation, where new technologies or innovations revive the industry and create new growth opportunities. Understanding the industry life cycle can help businesses anticipate market trends, adjust their strategies, and make informed decisions to stay competitive and maximize opportunities at each stage + READ PAGES 9 & 10 – CRISTIANA SLIDES Some conclusions: We should determine whether a firm is “acting its age” or stage of industry development. Growth firms should be reinvesting in operations to increase product offerings, increase economies of scale, and build brand loyalty. They are not yet worried about cost efficiency. They should not pay out dividends to investors but save them for internal growth. On the other hand, mature firms focus on cost efficiency (demand is largely from replacement). They find few opportunities to introduce new products. These firms should pay out cash to investors as dividends or stock repurchases because cash flows are strong but internal growth is limited. We should be concerned about firms that do not act their stage, such as a mature firm that is investing in low-return projects for the sake of increasing firm size. Life-cycle stages may not be as long or short as anticipated. An industry’s product may become obsolete quickly due to technological change, government regulation, societal change, or demographics. Life- cycle analysis is likely most useful during stable periods, not during periods of upheaval when conditions are changing rapidly. Furthermore, some firms will experience growth and profits that are dissimilar to others in their industries due to competitive advantages or disadvantages. IF WE KNOW THE STAGE WE CAN ANTICIPATE THE MAIN RISKS. ONCE WE UNDERSTAND THE MAIN RISKS, WE CAN ESTIMATE EXPECTED RETURN. THERE ARE MANY SOURCES TO ESTIMATE THE APROX. INDUSTRY ECPECTED RETURN. b) PORTER FIVE FORCES MODEL THREAT OF NEW ENTRANTS: • • Barriers to Entry: These are limitations that can make it difficult for new businesses to enter the market. For example, restrictions on the number of 5-star hotels in a location. Economies of Scale: Larger companies can reduce operational costs through volume, such as sharing labour or resources among multiple properties. • • • • • • • Brand Loyalty: Existing brands with a loyal customer base may deter new entrants. Capital Requirements: High capital requirements for entry can limit new competitors. Cumulative Experience: New businesses in foreign countries may need local partners due to lack of knowledge and contacts. Government Policies: Government policies can affect foreign investments, requiring a deep understanding of local regulations. Access to Distribution Channels: Emerging markets may have distribution monopolies. Switching Costs: Consider the cost for customers to switch from one provider to another. BARGAINING POWER OF BUYERS: • • • • • • • Number of Customers: The more customers, the greater their collective bargaining power. Size of Each Customer Order: Larger orders may give buyers more power. Differences Between Competitors: If competitors are similar, buyers have more choices. Price Sensitivity: Understanding how sensitive customers are to price changes. Buyer's Ability to Substitute: If customers can easily switch to alternatives, their power increases. Buyer's Information Availability: Informed buyers have more negotiating power. Switching Costs: The cost for customers to switch between providers affects their bargaining power. THREAT OF SUBSTITUTE PRODUCTS: • • • • • Number of Substitute Products Available: More substitutes increase the threat. Buyer Propensity to Substitute: Whether buyers are inclined to use substitutes. Relative Price Performance of Substitute: How substitutes compare in price and performance. Perceived Level of Product Differentiation: Whether buyers see differences between products. Switching Costs: The cost for customers to switch to substitute products. BARGAINING POWER OF SUPPLIERS: • • • Number and Size of Suppliers: Fewer suppliers with significant size have more bargaining power. Uniqueness of Supplier's Product: Unique products can give suppliers more power. Focal Company's Ability to Substitute: The ability of the company to find alternative suppliers can affect supplier power. RIVALRY AMONG EXISTING COMPETITORS: • • • Number of Competitors: More competitors can increase rivalry. Diversity of Competitors: The variety of competitors in the market. Industry Concentration: Few dominant players may lead to higher concentration of power. • • • • • Industry Growth: Growing industries may have more intense rivalry. Quality Differences: Differences in product or service quality can influence rivalry. Brand Loyalty: Brands with loyal customers may have an advantage. Barriers to Exit: Exit barriers, such as taxes or other costs, can affect the ability to leave the market. Switching Costs: The cost for businesses to switch strategies or exit the market. 3) INTEREST RATE (OPEN QUESTON) READ PAGES 19-25 → CRISTIANA NOTES 4) SLIDE:WHO IS RESPONSIBLE? 5) WHAT IS STRATEGIC MANAGEMENT? 6) STAGES OF STRATEGIC MANAGEMENT Formulate • Purpose • Mission: short-term (what are we doing today) to which customers • Vision: long-term => Be very realistic and critical Implement • Clear annual objectives • Motivate people w/ the main elements of the strategy. • Clear w/ the structure, who will implement and share the values, how it will be communicated (meetings…) • Budget Evaluate the decisions 7) STRATEGIC PLAN VS STRATEGIC MANAGEMENT 8) KEY TERMS OF STRATEGIC MANAGEMENT Competitive Advantage: Something a firm does exceptionally well compared to rival firms or any resource it possesses that other firms desire. Firms strive to achieve sustained competitive advantage by adapting to changes. Examples include cost leadership, legendary customer service, simplicity, location advantage, constant innovativeness, and focus on the core business. Vision and Mission Statements • Vision: A long-term statement that expresses what an organization aspires to become. It reflects hopes and dreams. • Mission: A short-term statement that defines the core business of an organization and distinguishes it from others. External Opportunities and Threats: Factors outside the organization's control that could benefit or harm it in the future. These include economic, social, cultural, demographic, environmental, political, legal, governmental, technological, and competitive trends and events. Internal Strengths and Weaknesses: Activities within the organization's control that are assessed in terms of their relative strength or weakness compared to competitors or the organization's own goals. Long-term Objectives: Specific results an organization seeks to achieve over an extended period, typically more than one year. Long-term objectives should be challenging, measurable, consistent, reasonable, and clear. Strategies: The means by which long-term objectives will be achieved. These are potential actions that require top management decisions and significant allocation of resources. Examples include geographic expansion, diversification, acquisition, product development, and more. Annual Objectives: Short-term milestones designed to help achieve long-term objectives. Typically, a set of annual objectives is created for each long-term objective, and they are crucial for strategy implementation. Policies: The means by which annual objectives will be achieved. Policies are established at the corporate level and provide guidelines for decision-making and addressing repetitive or recurring situations. 9) STRATEGY DIAMOND The Strategy Diamond model, developed by Donald Hambrick and James Frederickson, is a framework that represents five key elements of a successful strategy. These elements are 1. Arenas: this element refers to the specific markets, industries, or segments in which a company chooses to compete. It involves defining the scope of the business and identifying the geographic locations, customer segments, and product categories in which the company operates. 2. Differentiators: are the factors that set a company apart from its competitors. They can be unique features, capabilities, technologies, or customer experiences that create a competitive advantage. Differentiators highlight why customers would choose one company over another. 3. Vehicles: refer to the means by which a company will achieve its strategic objectives. They involve the strategic initiatives, projects, or programs that drive the execution of the strategy. Vehicles can include mergers and acquisitions, strategic partnerships, product development, or marketing campaigns. 4. Staging: refers to the timeline or sequence in which a company implements its strategy. It involves breaking down the strategic objectives into specific milestones or phases and determining the order in which they will be pursued. Staging helps to prioritize activities and allocate resources effectively. 5. Economic Logic: encompasses the financial rationale behind a company's strategy. It involves determining how the company will generate profits and create value for its shareholders. Economic logic considers factors such as revenue streams, cost structures, pricing strategies, and resource allocation to ensure long-term sustainability. By considering these five elements, the Strategy Diamond model provides a comprehensive framework for developing and analysing business strategies. Red Bull case Red Bull, the energy drink company, has successfully applied the Strategy Diamond model to shape its strategy. Here's how Red Bull aligns with each element of the model: 1. Arenas: Red Bull initially focused on the functional beverage market, specifically targeting young, active individuals seeking energy and stimulation. However, the company expanded its scope by sponsoring extreme sports events, music festivals, and other high-energy activities. By associating the brand with these arenas, Red Bull created a unique lifestyle positioning and extended its market presence. 2. Differentiators: Red Bull's differentiation lies in its brand image and marketing strategy. It positioned itself as a high-quality, premium energy drink, leveraging the perception of increased energy, performance, and vitality. The brand consciously associates itself with extreme sports, adventure, and unconventional activities, distinguishing it from other competitors in the market. 3. Vehicles: Red Bull's primary vehicle for executing its strategy is through extensive marketing and sponsorship activities. The company sponsors various international sports events, including Formula 1 racing, extreme sports competitions, and adrenaline-fueled activities. This not only enhances brand visibility but also creates emotional connections with the target audience. 4. Staging: Red Bull's strategy involves a well-planned staging approach. The company started by targeting niche markets and capturing a strong foothold before expanding to broader consumer segments. Red Bull strategically rolled out its product in specific locations, building demand and gradually expanding its geographic reach. 5. Economic Logic: Red Bull's economic logic centres on building a strong brand and leveraging it to generate revenue. The company's unique marketing approach, coupled with premium pricing, creates perceived value and allows for higher profit margins. Red Bull also diversifies its product offerings, expanding into related categories such as energy shots, cola, and flavoured drinks to maximize revenue streams. By effectively leveraging the Strategy Diamond model, Red Bull has established a powerful and distinctive brand identity, becoming a leader in the energy drink market globally. 10) MATRICES WHY US IT? WHAT DO YOU GET BY USING IT? 11) PORTER VS NET VALUE MODEL 12) JOINT-VENTURES & MERGERS & ACQUISITIONS A joint venture is a business entity created by two or more parties, generally characterized by shared ownership, shared returns and risks, and shared governance. Ex.: Marriott & AC Hotels Mergers and acquisitions (M&A) are business transactions in which the ownership of companies, business organizations, or their operating units are transferred to or consolidated with another company or business organization. Ex.: Facebook 13) WAYS TO FINANCE GROWTH STRATEGY + INTEREST RATES WHICH TYPES OF FUNDS FOR INVESTMENT Y0: Shareholders, family, and you, using personal savings, sell asset, properties, and durable goods. Or crowdfunding Y1: Angel investors Y2: Private equity funds (like venture capital) Y3: Business loan (or bank loan), stabilization stage Y4: Issuing bonds and creates shares 14) WHY STRATEGY IS NOT PERFORMING & CORPORATE CULTURE OFTEN NEGLECTED? “Culture eats strategy for breakfast” – Why? Because you might have an amazing strategy but if you do not have a deep culture, you do not reach anything. Why is corporate culture often neglected? 1. No immediate results might be witnessed. 2. Business owners cannot see it. 3. No direct benefits for the company. What are the market failures? 1. When unregulated markets fail to allocate resources efficiently. 2. The individual incentives (actions, motivations) for rational behaviour do not lead to rational outcomes for the group à externalities occur. Externality: when our actions and behaviour have impact on others (who are originally not involved) in a positive or negative way. Externalities like CONTROLLED MARKET by the government, companies are very regulated, not a fair game, you will find monopolies. (This is not capitalism, this is corruption). For example: If you know you are the best and you want to increase prices, but you cannot because there are regulations set by the government. FREE MARKET- there is not many regulations, you can have liquidity, competing in a fair atmosphere. CAPITALISM. 15) HOW A CULTURE CAN AFFECT THE TURNOVER OF A COMPANY? Without a deep culture, strategy serves for nothing. Lack of corporate culture: • • • It increases employee turnover rates, directly impacting their engagement in the hospitality industry field. What could be done to decrease it? Trainings, discounts, incentives, empowerment etc. Lead to a loss of productivity It lowers growth and share prices. 16) TYPES OF CORPORATE CULTURE a) Type of corporate culture 1# – 8 distinct culture styles: b) Types of corporate culture 2# - 4 types 17) THE PRINCIPAL AGENT MODEL 18) CONFLICT OF INTEREST, DIFFERENT SITUATIONS Self-Dealing: Conflict of Interest: Self-dealing is a conflict of interest because it involves a situation where a person in a position of trust, such as a company executive or board member, prioritizes their personal interests over the interests of the company or its clients. Practical Example: Imagine a CEO of a traded company using their insider knowledge to sell their own shares just before the company announces disappointing earnings. This action would harm other shareholders while benefiting the CEO. Misuse of Confidential Information: Conflict of Interest: Using confidential information for personal gain is a conflict of interest because it breaches the trust placed in an individual to handle sensitive data responsibly. Practical Example: An employee at an investment bank learns that a major client is about to merge with another company. Knowing this will significantly boost the client's stock price, they buy shares in the client's company before the merger is announced, profiting from the inside information. This is a clear breach of trust and securities laws. Nepotism: Conflict of Interest: Nepotism represents a conflict of interest because it involves making employment decisions based on personal relationships rather than merit or qualifications, which can harm the organization by undermining fairness and impartiality. Practical Example: A manager consistently promotes and gives favourable treatment to their unqualified relative in the workplace, passing over more deserving employees. This not only demoralizes other employees but can also result in suboptimal performance and decisions for the company. In each of these cases, the conflict of interest arises from a breach of trust, where individuals with fiduciary or decision-making responsibilities act in ways that benefit themselves or their personal relationships at the expense of the organization, its stakeholders, or the general public. These actions erode trust, fairness, and the integrity of the business or professional environment, making them widely recognized as unethical and, in many cases, illegal. Organizations often establish codes of conduct and conflict of interest policies to prevent and address such situations 19) EXPANSION ROUTES 1. More revenue a. Growth horizontal (supplies / clients) b. Growth vertical (companies + companies) 2. Diversification (if you diversify the risk that you have, you will have only risk that you cannot manager) a. Goal: To create a safety net for the revenue stream. b. Risk that you cannot manage volatility (dispersion to the average) different customer preferences and local business environment in each foreign market. c. Risk that you can manage being a good manager. 3. Access to talent 4. Competitive advantage: TESLA 5. Buy new companies in different countries (is a very good strategy but the riskiest, a typical mistake is doing it alone, is always good to have partners specially in emerging markets. Main types of the expansion routes in the hospitality industry: • Leased • Ownership • Management contract • Franchising • Joint ventures • Merges and acquisitions