Strategy and Contemporary Issues (2).pdf

Strategy and Contemporary Issues Chapter 1 What is strategy? Strategy is the long-term direction of an organization. The importance of a long-term perspective on strategy is emphasized by the ‘three horizons’ framework. The work of strategy is to define and express...

Strategy and Contemporary Issues Chapter 1 What is strategy? Strategy is the long-term direction of an organization. The importance of a long-term perspective on strategy is emphasized by the ‘three horizons’ framework. The work of strategy is to define and express the purpose of an organization through its mission, vision, values and objectives. The three-horizons framework It suggests organizations should think of themselves as comprising three types of business or activity, defined by their ‘horizons’ in terms of years. Horizon 1 = current core activities Horizon 2 = emerging activities that should provide new sources of profit Horizon 3 = possibilities such as R&D projects (take long time) While timescales might differ, the basic point about the ‘three-horizons’ framework is that managers need to avoid focusing on the short-term issues of their existing activities. Purpose = reason why a company exists Vision statement = concerned with the future the organization seeks to create. What do we want to achieve? Mission statement = provides employees and stakeholders clarity about what the organization is fundamentally there to do. Why do we do this? Objectives = statements of specific outcomes that are to be achieved. Often expressed in financial terms, for instance, the level of sales. Strategy statements Should have three main themes: the fundamental goals (mission, vision or objectives) that the organization seeks, the scope of the organization's activities and the particular advantages it has to deliver all of these. Levels of strategy Each level needs to be aligned with the others in order to create integration. Corporate-level Concerned with the overall scope of an organization and how value is added to the constituent businesses of the organization. Include geographical scope, diversity of products or services, acquisitions of new businesses. Business-level Is about how the individual businesses should compete in their particular markets (often called competitive strategy). Typically concerns issues such as innovation, appropriate scale and response to competitors' moves. Functional-level Concerned with how the components of an organisation deliver effectively the corporate- and business level strategies in terms of resources, processes and people. Functional decisions need to be closely linked to business-level strategy. The Exploring Strategy Framework The Exploring Strategy Framework has three major elements: understanding the strategic position, making strategic choices for the future and managing strategy in action. Choices often have to be made before the position is fully understood. Sometimes too a proper understanding of the strategic position can only be built from the experience of trying a strategy out in action. Strategic position Is concerned with the impact on strategy of the macro-environment, the industry environment, the organization's strategic capability, stakeholders and culture. Understanding these five factors is central for evaluating future strategy. Strategic choices Involve the options for strategy in terms of both the directions in which strategy might move and the methods by which strategy might be pursued. For instance, an organization might have a range of strategic directions open to it: the organization could diversify into new products; it could enter new international markets; or it could transform its existing products and markets through radical innovation. Strategy in action Strategy in action is about how strategies are formed and how they are implemented. The emphasis is on the practicalities of managing. Context, content & process Strategy context refers to multiple layers of environment, internal and external to organizations. All organizations need to take into account the opportunities and threats of their external environments. Strategy content concerns the content (or nature) of different strategies and their probability of success. Here the focus is on the merits of different strategic options. Strategy and performance researchers started by using economic analysis to understand the success of different types of diversification strategies. Strategy process, broadly conceived, examines how strategies are formed and implemented. Research here provides a range of insights to help managers in the practical processes of managing strategy. A strategy chosen purely on economic grounds can easily be undermined by psychological and sociological factors. On the other hand, a strategy that is chosen on the psychological grounds of emotional enthusiasm, or for sociological reasons of cultural acceptability, is liable to fail if not supported by favorable economics. Chapter 3 - Industry and sector Analysis Porter's five forces Where competition and buyer and supplier strengths are low, and there is little threat of new competitors, participating firms should normally expect good profits. Porter’s main message is that where the five forces are high and strong, industries are not attractive. The aim: The aim of the five force analysis is an assessment of the attractiveness of the industry and any possibilities to manage strategies in relation to the forces to promote long-term survival and competitive advantage. Why? Porter’s Five Forces Framework helps to analyze an industry and identify the attractiveness of it in terms of five competitive forces: (i) extent of rivalry between competitors (ii) threat of entry, (iii) threat of substitutes, (iv) power of buyers and (v) power of suppliers. Competitive rivalry Competitive rivals are organizations aiming at the same customer groups and with similar products and services (i.e. not substitutes). In the European airline industry, Air France and British Airways are rivals; high-speed trains are a ‘substitute’. Five factors define the extent of rivalry in an industry or market: 1. Competitor concentration and balance. Where competitors are numerous or of roughly equal size or power there is the danger of intensely rivalrous behavior as competitors attempt to gain dominance over others, through aggressive price cuts, for example. 2. Industry growth rate. In situations of strong growth, an organisation can grow with the market, but in situations of low growth or decline, any growth is likely to be at the expense of a rival, and meet with fierce resistance 3. High fixed costs. Industries with high fixed costs, perhaps because they require high investments in capital equipment or initial research, tend to be highly rivalrous. Companies will seek to spread their costs (i.e. reduce unit costs) by increasing their volumes: to do so, they typically cut their prices, prompting competitors to do the same and thereby triggering price wars in which everyone in the industry suffers. 4. High exit barriers. Exit barriers might be high for a variety of reasons: for example, high redundancy costs or high investment in specific assets such as plants and equipment which others would not buy. 5. Low differentiation. In a commodity market, where products or services are poorly differentiated, rivalry is increased because there is little to stop customers switching between competitors and the only way to compete is on price. For instance: Petrol. The threat of entry An attractive industry has high barriers to entry that reduce the threat of new competitors. Five important entry barriers:  1. Scale and experience. Once incumbents have reached large-scale production, it will be very expensive for new entrants to match them and until they reach a similar volume they will have higher unit costs. This scale effect is increased where there are high capital investment requirements for entry, for example research costs in pharmaceuticals or cap- ital equipment costs in automobiles 2. Access to supply or distribution channels. In many industries manufacturers have had control over supply and/or distribution channels. 3. Expected retaliation. Retaliation could take the form of a price war or a marketing blitz. Just the knowledge that incumbents are prepared to retaliate is often sufficiently discouraging to act as a barrier. 4. Legislation or government action. Legal restraints on new entries vary from patent pro- tection (e.g. pharmaceuticals), to regulation of markets (e.g. pension selling), through to direct government action (e.g. tariffs). 5. Incumbency advantages. The medical instruments industry is, for example, protected by many patents and Coca Cola and Pepsi have brand loyalties developed over decades that few can overcome. Threat of substitutes Substitutes are products or services that offer the same or a similar benefit to an industry’s products or services, but have a different nature. A tablet computer is a substitute for a laptop. Substitutes can reduce demand for a particular type of product as customers switch to alternatives. Thus, although Eurostar has no direct competitors in terms of train services from Paris to London, the prices it can charge are ultimately limited by the cost of flights between the two cities. Two important points: 1. The price/performance ratio is critical to substitution threats. A substitute is still an effective threat even if more expensive, so long as it offers performance advantages that customers value 2. Extra-industry effects are the core of the substitution concept. If the buyers’ switching costs for the substitute are low the threat increases and the higher the threat, the less attractive the industry is likely to be. The power of buyers It is very important that buyers are distinguished from ultimate consumers. For a pharmaceutical company, the strategic customer is the hospital, not the patient. Buyer power is likely to be high when some of the following four conditions prevail:  1. Concentrated buyers. Where a few large customers account for the majority of sales, buyer power is increased. This is the case for items such as milk in the grocery sector in many European countries, where just a few retailers dominate the market. 2. Low switching costs. Where buyers can easily switch between one supplier and another, they have a strong negotiating position. Switching costs are typically low for standardized and undifferentiated products like commodities such as steel. 3. Buyer competition threat. If the buyer has the capability to supply itself, or if it has the possibility of acquiring such a capability, it tends to be powerful. For example, some steel companies have gained power over their iron ore suppliers as they have acquired iron ore sources for themselves. 4. Low buyer profits and impact on quality. First, if the buyer group is unprofitable and pressured to reduce purchasing costs and, second, if the quality of the buyer’s product or services is little affected by the purchased product. The power of suppliers The factors increasing supplier power are the converse to those for buyer power. Thus supplier power is likely to be high where there are: 1. Concentrated suppliers. Where just a few producers dominate supply, suppliers have more power over buyers. 2. High switching costs. If it is expensive or disruptive to move from one supplier to another, then the buyer becomes relatively dependent and correspondingly weak. 3. Supplier competition threat. Suppliers have increased power where they are able to enter the industry themselves or cut out buyers who are acting as intermediaries. 4. Differentiated products. When the products or services are highly differentiated, suppliers will be more powerful. Complementors and network effects Some industries may need the understanding of a ‘sixth force’, organizations that are complementors rather than simple competitors. When? An organization is your complementor if it enhances your business attractiveness to customers or suppliers. Complementors may cooperate to increase the total value available. How? On the demand side, if customers value a product or service more when they also have the other organization’s product there is a complementarity with respect to customers. For example, app providers are complementors to Apple and other smartphone and tablet suppliers because customers value the iPhone and iPad more if there are a wide variety of appealing apps to download. On the supply side, another organization is a complementor with respect to suppliers if it is more attractive for a supplier to deliver when it also supplies the other organization. This suggests that competing airline companies, for example, can be complementary to each other in this respect because for a supplier like Boeing it is more attractive to invest in particular improvements for two customers rather than one. Network effects There are network effects in an industry when one customer of a product or service has a positive effect on the value of that product for other customers. This implies that the more customers that use the product, the better for everyone in the network. For example, the value of the online auction site eBay increases for a customer as the network of other sellers and buyers grows on the site. Defining the industry 1. The industry must not be defined too broadly or narrowly. 2. The broader industry value chain needs to be considered. Different industries often operate in different parts of a value chain or value system and should be analyzed separately. 3. Most industries can be analyzed at different levels, for example different geographies, markets and even different product or service segments within them. Larger corporations are often organized based on diverse markets and segments and would thus analyze each separately. Industry types PIMS - Profit Impact of Market Strategy Some PIMS key indicators of business success: - Strong market position - High quality of product - Lower cost - Lower requirement for capital investment Experience curve economics Why? - Labor efficiency - Standardization, specialization and method improvements - Shared experience effects (scope) - Product redesign Market structure → industrial organization (IO) Market structure: - The number of producing firms, and the number of buyers and their sizes - The degree of product differentiation - The character of international competition - Existing barriers to entry and exit - Cost and production structures of firms Structure → conduct → performance (SCP) The industry life cycle - stages The industry life-cycle concept proposes that industries start small in their development or introduction stage, then go through a period of rapid growth (the equivalent to ‘adolescence’ in the human life cycle), culminating in a period of ‘shake-out’. The final two stages are first a period of slow or even zero growth (‘maturity’), and then the final stage of decline (‘old age’). Strategic groups Strategic groups are organizations within the same industry or sector with similar strategic characteristics, following similar strategies or competing on similar bases. Strategic group map: - Managers can focus on their direct competitors within their particular strategic group, rather than the whole industry as rivalry often is strongest between these. - Strategic group maps can identify the most attractive ‘strategic spaces’ within an industry. Some spaces on the map may be ‘white spaces’, relatively under-occupied. - As with barriers to entry, it is good to be in a successful strategic group protected by strong mobility barriers, to impede imitation. Market segment A market segment is a group of customers who have similar needs that are different from customer needs in other parts of the market. Segmentation should reflect an organization’s strategy and strategies based on market segments must keep customer needs firmly in mind. Two issues are particularly important: 1. Variation in customer needs. Focusing on customer needs that are highly distinctive from those typical in the market is one means of building a long-term segment strategy. Being able to serve a highly distinctive segment that other organizations find difficult to serve is often the basis for a secure long-term strategy.  2. Specialization within a market segment can also be an important basis for a successful segmentation strategy. This is sometimes called a ‘niche strategy’. Base for market segmentation: Critical success factors and Blue Oceans Critical success factors (CSFs) are those factors that either are particularly valued by customers (i.e. strategic customers) or provide a significant advantage in terms of cost. A value innovator is a company that competes in ‘Blue Oceans’. Blue Oceans are new market spaces where competition is minimized. These Blue Oceans are strategic gaps in the marketplace. Threats & opportunities - PESTEL analysis of the macro-environment might reveal threats and opportunities presented by technological change, or shifts in market demographics or such like factors. - Identification of key drivers for change can help generate different scenarios for manage- rial discussion, some more threatening and others more favorable. - Porter’s five forces analysis might, for example, identify a rise or fall in barriers to entry, or opportunities to reduce industry rivalry, perhaps by acquisition of competitors. - Blue Ocean thinking might reveal where companies can create new market spaces; alternatively, it could help identify success factors which new entrants might attack in order to turn ‘Blue Oceans’ into ‘Red Oceans’. Corporate portfolio strategy (The BCG growth-share matrix) Chapter 2 - Working with strategy Strategic thinking System 1: Thinking fast is intuitive, quick and decisive System 2: Thinking slow is deliberative, analytical and thorough Convergent thinking is the left-brain: analytical & focused. Focusing on particular ideas, perspectives and assumptions, within a structured framework or parameters, to achieve a specific business outcome. Divergent thinking is closer to the right-brain: creative and receptive to a wide range of ideas and information. Expanding the pool of ideas and incorporating different perspectives and assumptions, within a fluid framework or parameters, without directly seeking to address a specific business challenge. Exploration and exploitation Exploitation = Exploiting current business, linked to convergent thinking Exploration = Seeking out new way of growth, linked to divergent thinking Models & techniques Pestel Analysis PESTEL analysis highlights six environmental factors in particular: political, economic, social, technological, ecological and legal. This list underlines that the environment includes not only the economics of markets, but also non market factors. The market environment: consists mainly of suppliers, customers and competitors. These are environmental participants with whom interactions are primarily economic. Here, companies typically compete for resources, revenues and profits. The nonmarket environment: involves primarily the social, political, legal and ecological factors, but can also be impacted by economic factors. Key participants in the nonmarket environment are not just other businesses, but non-governmental organizations (NGOs), politicians, government departments, regulators, political activists, campaign groups and the media. Nonmarket factors are particularly important where the government or regulators are powerful (for instance in healthcare sectors); where consumer sensitivities are high (for instance in the food business); or in societies where political, business and media elites are closely interconnected (typically smaller countries, or countries where the state is powerful). Political factors The political element of PESTEL highlights the role of the state and other political factors in the macro-environment. - The role of the state. In many countries and sectors, the state is often important as a direct economic actor, for instance as a customer, supplier, owner or regulator of businesses. - Exposure to civil society organizations. Civil society comprises a whole range of organizations that are liable to raise political issues, including political lobbyists, campaign groups, social media or traditional media. Political risk analysis is the analysis of threats and opportunities arising from potential political change. There are two key dimensions to political risk analysis: The macro–micro dimension. Macro risk is that which attaches to whole countries (or regions) Micro risk is that which attaches to the specific organization. Economical factors Macro-economic factors such as currency exchange rates, interest rates and fluctuating economic growth rates around the world. It is important for an organization to understand how its markets are affected by the prosperity of the economy as a whole. A key concept for analyzing macro-economic trends is the economic cycle. Despite the possibility of unexpected shocks, economic growth rates have an underlying tendency to rise and fall in regular cycles. - The Kitchin or ‘stock’ cycle is the shortest cycle, tending to last about three to four years from one cyclical peak to the next. This short cycle is driven by the need for firms to build up stocks of raw materials and parts as economies emerge from recessions. A Kitchin cycle turning point comes when stocks are totally run down and firms fuel the upturn by building-up stocks again. - The Juglar or ‘investment’ cycle is a medium-term cycle, typically stretching over 7–11 years. The cycle is driven by surges of investment in capital equipment, for instance plant and machinery. The Juglar downturn comes once these investments have been made across an economy and firms are able to cut back on further investment until the equipment is worn out. - The Kuznets or ‘infrastructure’ cycle is the longest, lasting between 15 and 25 years. These cycles follow the life-spans of infrastructural investments, for example in housing or trans- port. The cyclical upturn comes when the last generation of infrastructure is worn out or outdated, and a new surge of investment is required. The three sub-cycles add together to determine overall cycles of economic growth. Some industries are particularly vulnerable to economic cycles, for instance: - Discretionary spend industries - in industries where purchasers can easily put off their spending for a year or two, there tend to be strong cyclical effects. Housing, restaurants and cars tend to be highly cyclical because many people can choose to delay spending on these for a while. - High fixed costs industries - such as airlines & hotels suffer from economic downturns because high fixed costs in equipment tend to encourage competitive price-cutting to ensure maximum capacity when demand is low. Social factors - Demographics. For example, the aging populations in many Western societies create opportunities and threats for both private and public sectors. There is increasing demand for services for the elderly, but diminishing supplies of young labor to look after them. - Distribution. Changes in wealth distribution influence the relative sizes of markets. Thus the concentration of wealth in the hands of elites over the last 20 years has constrained some categories of ‘middle-class’ consumption, while enlarging markets for certain luxury goods. - Geography. Industries and markets can be concentrated in particular locations. In the United Kingdom, economic growth has in recent decades been much faster in the London area than in the rest of the country. Similarly, industries often form ‘clusters’ in particular locations: thus there are high concentrations of scientists and engineers in California’s Silicon Valley - Culture. Changing cultural attitudes can also raise strategic challenges. Changing cultural attitudes can be linked to changing demographics.Thus the rise of ‘digital natives’ (generations born after the 1980s, and thus from childhood immersed in digital technologies) is changing expectations about media, consumption and education. A second important social aspect of the macro-environment is organizational networks, with significant implications for innovativeness, power and effectiveness. An organizational field is a community of organizations that interact more frequently with one another than with those outside the field. Sociogram Sociograms are maps of potentially important social (or economic) connections within an organizational field. Power and innovation increase with: Network density – the number of interconnections between members. Central hub positions – when a particular organization interacts with many other members. Broker positions – an organization that connects otherwise separate groups/organizations. Sociogram of social networks within an organizational field Technological factors As in the case of internet streaming, new technologies can open up opportunities for some organizations (e.g. Spotify and YouTube), while challenging others (traditional music and broadcasting companies). - Research & development budgets. Innovative firms, sectors or countries can be identified by the extent of spending on research, typically reported in company annual reports and government statistics - New product announcements. Organizations typically publicize their new product plans through press releases and similar media - Media coverage. Specialist technology and industry media will cover stories of the latest or impending technologies, as will various social media. Many organizations also publish technology roadmaps for their sectors going forward. Technology roadmaps project into the future various product or service demands, identify technology alternatives to meet these demands, select the most promising alternatives and then offer a timeline for their development. Ecological factors Ecological stands specifically for ‘green’ macro-environ- mental issues, such as pollution, waste and climate change. Environmental regulations can impose additional costs, for example pollution controls, but they can also be a source of opportunity, for example the new businesses that emerged around mobile phone recycling. - Direct pollution obligations are an obvious challenge, and nowadays typically involve not just cleaning up ‘at the end of the pipe’, but also minimizing the production of pollutants in the first place. - Product stewardship refers to managing ecological issues through both the organization’s entire value chain and the whole life cycle of the firm’s products. Stewardship here might involve responsibility for the ecological impact of external suppliers or final end-users. - Sustainable development is a criterion of increasing importance and refers not simply to reducing environmental damage, but to whether the product or service can be produced indefinitely into the future. Legal factors These can cover a wide range of topics: for example, labor, environmental and consumer regulation; taxation and reporting requirements; and rules on ownership, competition and corporate governance. Legal issues form an important part of the institutional environment of organizations, by which is meant the formal and informal ‘rules of the game’. Formal and informal rules vary sufficiently between countries to define very different institutional environments, sometimes known as ‘varieties of capitalism’ - Liberal market economies are institutional environments where both formal and informal rules favor competition between companies, aggressive acquisitions of one company by another and free bargaining between management and labor. These economies tend to support radical innovation and are receptive to foreign firms. The United States and the United Kingdom. - Coordinated market economies encourage more coordination between companies, often supported by industry associations or similar frameworks. Companies in these coordinated market economies tend to rely on banks for funding, while family ownership is often common. Germany & Sweden. - Developmental market economies tend to have strong roles for the state, which will either own or heavily influence companies that are important for national economic  development. Banks, often state-owned, will be a key source of funding. Brazil, China & India. Key drivers for change Key drivers for change are the environmental factors likely to have a high impact on industries and sectors, and the success or failure of strategies within them. Forecasting Forecasting takes three fundamental approaches based on varying degrees of certainty: single-point, range and multiple-futures forecasting. Single-point forecasting Organizations have such confidence about the future that they will provide just one forecast number. For instance, an organization might predict that the population in a market will grow by 5 per cent in the next two years. This kind of single-point forecasting implies a great degree of certainty. Range forecasting Organizations have less certainty, suggesting a range of possible outcomes. These different outcomes may be expressed with different degrees of probability, with a central projection identified as the most probable. Alternatives future forecasting Typically involves even less certainty, focusing on a set of possible yet distinct futures. Instead of a continuously graduated range of likelihoods, alternative futures are discontinuous: they happen or they do not, with radically different outcomes Directions of change Megatrends Are large-scale political, economic, social, technological, ecological or legal movements that are typically slow to form, but which influence many other activities and views, possibly over decades. The megatrend towards global warming affects agriculture, tourism and, with more extreme climatic events, insurance. Inflexion points Moments when trends shift in direction, for instance turning sharply upwards or downwards. For example, after decades of stagnation and worse, in the early twenty-first century sub-Saharan Africa may have reached an inflexion point in its economic growth, with the promise of substantial gains in the coming decade or so. Weak signals Are advanced signs of future trends and are particularly helpful in identify- ing inflexion points. A weak signal for the worldwide financial crisis that began in 2008 was the rise in mortgage failures in California the previous year. Scenario analysis Offers plausible alternative views of how the macro-environment might develop in the future, typically in the long term. Scenario analysis is typically used in conditions of high uncertainty, for example where the environment could go in several highly distinct directions. Build on PESTEL analysis and drivers for change. The point of scenarios is more to learn than to predict. Scenarios are used to explore the way in which environmental factors interrelate and to help keep managers’ minds open to alternative possibilities in the future. A scenario with a very low likelihood may be valuable in deepening managers’ understanding even if it never occurs. The process often follows five basic steps: 1. Defining scenario scope. Scope refers to the subject of the scenario analysis and the time span. For example, scenario analyses can be carried out for a whole industry globally, or for particular geographical regions and markets. 2. Identifying the key drivers for change. PESTEL analysis can be used to uncover issues likely to have a major impact upon the future of the industry, region or market. 3. Developing scenario stories. 4. Identifying impacts of alternative scenarios on organizations. It is important for an organization to carry out robustness checks in the face of each plausible scenario and to adapt strategies that appear vulnerable and develop contingency plans in case they happen.  5. Monitor progress. Once the various scenarios are drawn up, organizations should monitor progress over time, to alert themselves to whether and how developments actually fit scenario expectations Intra-organizational relationships Organizations are composed of interrelated subsystems and like organisms are made of interrelated parts and organs. Inter-organizational relationships Emphasis the ”flow” between the organization and its environment: customers, competitors, suppliers, labor unions, and governmental agencies. Swot Analysis Provides a general summary of the Strengths and Weaknesses explored in an analysis of strategic capabilities and the Opportunities and Threats explored in an analysis of the environment. Internal analysis = strengths & weaknesses (gained by VRIO, value chain) External analysis = opportunities & threats (gained by pestel, scenario planning, five forces) Strengths - are those internal factors that make an organization superior and more competitive than its peers. Strengths might include a skilled workforce, a unique technology or a valuable brand. Weaknesses - limitations, faults, or defects within the organization that will keep it from achieving its objectives. Weaknesses might include poor information technology systems, a negative or cynical organizational culture or a bad reputation with customers. Opportunities - include any favorable current or prospective situation in the organization’s environment, such as a trend, change, or overlooked need. An opportunity might include the rapid growth of a relevant market segment or the emergence of a new technology that the organization is well-placed to exploit. Threats - include any unfavorable situation, trend or impending change in an organization’s environment that is currently or potentially damaging to its ability to achieve its objectives. For example, a threat could be a downturn in demand, powerful suppliers, or the arrival of a new competitor in the market. Collision matrix - TOWS (action plan) The matrix builds directly on the information in a SWOT exercise. Each box of the TOWS matrix can be used to identify options that address a different combination of the internal factors (strengths and weaknesses) and the external factors (opportunities and threats). Dangers in Swot Analysis - Confusing internal (strengths & weaknesses) – external (opportunities & threats) - Long lists with no attempt at prioritization. Focus on strengths and weaknesses that differ in relative terms compared to competitors or comparable organizations and leave out areas where the organisation is equal with others. - Concrete conclusion based on informed analyses (TOWS). SWOT can lack specificity or depth. - Overgeneralization – sweeping statements often based on biased and unsupported opinions. Strategic thinking techniques Allocentricism Involves thinking not only about your own organization but about other actors such as suppliers, customers , rivals & partners. Strategy is not all about you; it is about the others upon whom your success depends. Issue trees Involve the systematic breaking-down of big issues into subsidiary issues for further analysis. The goal is to construct a set of subsidiary issues that are mutually exclusive (issues that are distinct, requiring separate analysis) and collectively exhaustive (covering all practical issues/options) – MECE. For profitability, the first two subsidiary issues would be whether to raise revenues or cut costs; further subsidiary issues would flow from there (do you raise revenues by increasing volumes or by increasing prices, and so on. System mapping System maps show the consequential links between the elements of a strategic problem. In a system, all the parts are interconnected, so changing one part is liable to have knock-on effects (‘feedback loops’) on all the other parts. Often, a small change can set off a chain of events that is much bigger than the initial change. Developing a strategic plan A strategic plan is a roadmap for seizing the opportunities and minimizing the threats facing an organization. Might include the following:  - Purpose, vision, mission and objectives statement. What the organization is trying to achieve is the point of the whole strategy, and the critical starting place. - Environmental analysis. - Resource and capability analysis. - Business model - Strategic options - Proposed strategy - Additional resources - Key changes A good strategy (position, choices & action): - Diagnosis defines the challenge facing the organization. What is holding the organization back from its goals? - A guiding policy. - A set of coherent actions. Week 38 Guest lecture - Dörr & Portbolaget AB Strategic planning is criticized → low rate of successful implementation Managers believe that implementation is more difficult than formulation. Problems related to the implementation of a strategy: - “Set a lot of objectives” - “Limit strategy” - “Relevant data” - find the optimal strategy. Pay less attention to the implementation - “Complexity is needed”, could be encouraged but might not be needed Strategy is more than a plan. We can see strategy in a way of behavior, a pattern in a stream of decisions (Mintzberg). Hoshin Kanri The model is about using a participative and shared commonality of direction, rather than top-down command and control. The overarching principle is that everybody should be involved in strategy. - An understandable and challenging objective - A fact-based organization - Change curiosity - asking why but listening to the answer and learning from it  - Learning oriented organization (process orientation) All Hoshins (action points) together make up the strategic plan. What is influencing the realization of a strategy? Internal factors - ownership, organizational size & history, leadership style External factors - a competitor change of behavior, external shock, competition What is influencing the change? - Simple structure (20 employees) - Non-dynamic environment - Need for change - Curiosity & learning attitude The most important thing to understand is to focus on culture. You have to consider the culture in organization, especially the leadership style. Chapter 5 - Resources and capabilities The resources and capabilities of an organization contribute to its long-term survival and, potentially, to competitive advantage. Managers need to consider whether their organization has resources and capabilities to achieve and sustain competitive advantage. To do so, they need to consider how and to what extent it has resources and capabilities that are (i) valuable; (ii) rare; (iii) inimitable; and (iv) supported by the organization. - Focus on imperfections in factor markets instead of product markets - Utilization of resources gives rise to organizational capabilities. - Value and immobility of resources give rise to sustainable competitive advantage Resource-based view (RBV): the competitive advantage and superior performance of an organization are explained by the distinctiveness of its resources and capabilities. Resources = The assets that organizations have or can call upon. “What we have”. Intangible assets like brand, patent are often considered resources even if they are not something an organization physically has. Capabilities = the ways in which those assets are deployed. “What we do” - Strategy: not only a positioning of the products of the firm (outputs). - Strategic choices depend upon an evolving resource-base of the firm - Strategy is about finding and building an appropriate resource base. Competition takes place on the level of resources & capabilities (inputs) Why focus on resources and capabilities? Source of direction (directional problem) - What business are we in? Especially in volatile markets, difficulties in defining markets Source of competitive advantage (cross-sectional problem) What gives rise to above-normal rents? - Intra-industry differences greater than inter-industry differences - Competitive position on the market rests on firm resources and capabilities Identifying resources 1. Physical capital resources: physical technology such as plants and machinery, location, and raw materials. 2. Financial capital resources: revenues to the firm, also including debt, equity and retained earnings. 3. Human capital resources: training, experience, managerial judgment, formal education, etc. possessed by individual members of the organization (both managers and workers). 4. Organizational capital resources: planning and reporting structure of the organization, controlling and coordination systems, but also informal relationships between individuals, both intra- and inter-organizational. Tangible = financial & physical Intangible = technology, reputation & culture Human = skills, communication, motivation Critiques of RBV - No managerial implications - Limited applicability, Unique, large firms, stable - SCA not achievable, Competition, dynamics - VRIO not necessary/sufficient condition for SCA, Lack of empirical support, Uncertainty and immobility more general categories - Definition of resource, Too inclusive Threshold and distinctive resources and capabilities Threshold resources and capabilities are those needed for an organization to meet the necessary requirements to compete at all in a given market and achieve parity with competitors in that market. Distinctive resources and capabilities are ‘winners’ required to achieve competitive advantage. These are dependent on an organization having a distinctiveness or uniqueness that is of value to customers and that competitors find difficult to imitate. Example: Apple has distinctive resources in smartphone technologies including in its innovation platform and in its powerful brand, together with distinctive capabilities in design and in understanding consumer behavior. VRIO Framework - value, rarity, inimitability, organizational support V - Value of resources and capabilities Resources and capabilities are valuable when they create a product or a service that is of value to customers and enables the organization to respond to environmental opportunities or threats. - Value to customers: A resource and capability may historically have been of value to customers but may no longer be. In addition, managers may seek to build on resources and capabilities that they may see as valuable, but that do not meet customers’ requirements in this regard. - Taking advantage of opportunities and neutralizing threats: The most fundamental point is that to be valuable resources and capabilities need to address opportunities and threats that arise in an organization’s environment. - Cost: The product or service needs to be provided at a cost that still allows the organization to make the returns expected of it. R - Rarity Resources and capabilities that are valuable but common among competitors are unlikely to be a source of competitive advantage. If competitors have the same or similar resources and capabilities, they can respond quickly to the strategic initiative of a rival. Rare resources and capabilities, on the other hand, are those possessed uniquely by one organization or by a few others. I - Inimitability Does a firm without a resource face a disadvantage in obtaining or developing it? If an organization has a competitive advantage because of its particular marketing and sales skills, it can only sustain this if competitors cannot imitate, obtain or substitute for them or if the costs to do so would eliminate any gains made. Capabilities tend to involve more intangible imitation barriers. In particular, they often include linkages that integrate activities, skills, knowledge and people both inside and outside the organization in distinct and mutually compatible ways. These linkages can make capabilities particularly difficult for competitors to imitate and there are three primary reasons why this may be so. Complexity - Difficult to imitate because they are complex and involve interlinkages. There may be linked activities and processes that, together, deliver customer value. Organizations can make it difficult for others to imitate or obtain their bases of competitive advantage by developing activities together with customers or partners such that they become dependent on them. Example: Apple and app providers. Causal ambiguity - Competitors may find it difficult to discern the causes and effects underpinning an organization’s advantage. For example, the know-how of the buyers in a successful fashion retailer may be evident in the sales achieved for the ranges they buy year after year. But this may involve subtleties like spotting new trends and picking up feedback from pioneering customers that may be very difficult for competitors to comprehend so they will find it difficult to imitate. Culture & history - Resources and capabilities that involve complex social interactions and interpersonal relations within an organization can be difficult and costly for competitors to imitate. For example, capabilities can become embedded in an organization’s culture. Tacit organizational knowledge = It is personal, context-specific knowledge and therefore hard to formalize and communicate. It could be the knowledge of a highly experienced sales force or research and development team. Explicit knowledge = Is knowledge that can be articulated and transmitted in formal systematic ways. O - Organizational support To fully take advantage of the resources and capabilities, an organization’s structure and formal and informal management control systems need to support and facilitate their exploitation. For example, if an organization has a unique patent underlying a product that customers value, it may still not be able to convert this into a competitive advantage if it does not have the appropriate sales force to sell the product. Supporting capabilities have been labeled complementary capabilities as, by themselves, they are often not enough to provide for competitive advantage, but they are useful in the exploitation of other capabilities that can provide for this. 1. Stakeholders that provide access to resources and capabilities that are unique and vital for competitive advantage need to be compensated. If not, they may not contribute and, without them, there simply will be no competitive advantage. 2. Their bargaining power will be decisive for how much of the competitive advantage and resulting profits an organization is able to appropriate. VRIO Analysis A VRIO analysis helps to evaluate if, how and to what extent an organization or company has resources and capabilities that are (i) valuable, (ii) rare, (iii) inimitable and (iv) supported by the organization. 1. The model assumes that firms within an industry (or group) may be heterogeneous with respect to the resources they control 2. Assumes that these resources may not be perfectly mobile across firms, and thus heterogeneity may be long lasting The value chain and value system The value chain describes the categories of activities within an organization which, together, create a product or service. Most organizations are also part of a wider value system, the set of inter-organisational links and relationships that are necessary to create a product or service. The value chain The important point is that the concept of the value chain invites the strategist to think of an organization in terms of sets of activities. Each of the primary activities is linked to support activities which help to improve the effectiveness or efficiency of primary activities. Decisions related to the value system & chain: - The ‘make or buy’ or outsourcing decision for a particular activity is critical: which activities most need to be part of the internal value chain because they are central to achieving competitive advantage? Internalize activities on the upper side of the smile. Buy-argument for the lower levels of the smile. - What are the activities and cost/price structures of the value system? It’s essential to understand the entire value system and its relationship to an organization’s value chain as changes in the environment may require outsourcing or integration of activities depending on changing cost/price structures. - Where are the profit pools? Profit pools refer to the different levels of profit available at different parts of the value system. Some parts of a value system can be inherently more profitable than others because of the differences in competitive intensity. - Partnering. Who might be the best partners in the various parts of the value system? And what kinds of relationships are important to develop with each partner? All organizations comprise sets of resources and capabilities, but that these are likely to be configured differently across organizations. It is this variable configuration that makes an organization and its strategy more or less unique. VRIO and value chain analysis can help with this. Benchmarking Used as a means of understanding how an organization compares with others. It may be organizations that compete in the same industry or sectors, typically competitors, or other organizations that perform the same or similar functions. There are 2 approaches to benchmarking:  1. Industry/sector benchmarking. Insights about performance standards can be gleaned by comparing performance against other organizations in the same industry sector or between similar service providers against a set of performance indicators. 2. Best-in-class benchmarking. Best-in-class benchmarking compares an organization’s performance or capabilities against ‘best-in-class’ performance – from whichever industry – and therefore seeks to overcome some of the above limitations. Benchmarking has 2 potential limitations: 1. Surface comparisons. If benchmarking is limited to comparing outputs, it does not directly identify the reasons for relative performance in terms of underlying resources and capabilities. For example, it may demonstrate that one organization is poorer at customer service than another, but not show the underlying reasons. 2. Simply achieving competitive parity. Benchmarking can help an organization to develop capabilities and create value in the same way as its competitors and those best-in-class. To achieve competitive advantage, an organization needs to move further and develop its own distinctive resources and capabilities. Identifying capabilities - Potential access to a number of markets, technologies or products - Value-adding for the customer in the end-product - Hard to imitate, few Dynamic capabilities Is an organization’s ability to renew and recreate its resources and capabilities to meet the needs of changing environments. There is a danger that capabilities and resources 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. So if resources and capabilities are to be effective over time, they need to change; they cannot be static. They are dynamic in the sense that they can create, extend, or modify an organization’s existing ordinary capabilities. New product development is a typical example of a dynamic capability. Three generic types of dynamic capabilities: 1. Sensing. Sensing implies that organizations must constantly scan, search and explore opportunities across various markets and technologies. 2. Seizing. Once an opportunity is sensed, it must be seized and addressed through new products or services, processes, activities, etc. 3. Reconfiguring/transforming. To seize an opportunity may require renewal and reconfiguration of organizational capabilities and investments in new technologies,  manufacturing, markets, manufacturing, markets, etc. - Sensing capabilities are to do with understanding an organization’s strategic position; - seizing opportunities relate to making strategic choices; - and reconfiguration is to do with enacting strategies. Relates to the framework (strategic position, choices and strategy in action). Implications for strategy What assets are related to organizational capabilities? - End products - Core products - Core capabilities - The three metaphor Strategy formulation 1. Identify and classify the firm’s resources (relative to competitors) 2. Identify the firm's capabilities  3. Appraise the rent-generating potential of resources & capabilities in terms of: a) their potential for sustainable advantage b) the appropriability of their returns 4. Select a strategy which best exploits resources and capabilities relative to external opportunities 5. Identify resource gaps which need to be filled. Invest in replenishing, augmenting & upgrading the firm’s resource-base Strategy process - market entry process: 1. Identify your firm’s unique resources 2. Decide in which market those resources can earn the highest rents 3. Decide whether the rents from those assets are most effectively utilized by – Integrating into relevant markets – Selling the relevant output to related firms – Selling the assets themselves to a firm in a related business The interface between strategy and the firm (inside-out and outside-in) Chapter 7 - Culture and strategy “Culture eats strategy for breakfast” → emphasizing how culture helps to define the strategy of an organization. Culture could be seen as a part of the strategy and therefore organizational culture is a key strategic factor. History, geography and fields History is a fundamental part of organizational culture and thereby strategy itself. History does not determine the culture, it is a resource to be managed. Historical continuity Leaders who have come up through the organization tend to support the culture that produced them. It is represented by a continuous line, sloping gently from the organization's original culture. There is some movement as the culture adapts to a changing environment, but change is steady and small. Stakeholders & competitors can expect a few big surprises. Historical selection The line represents elements from an organization's history that are selected for inclusion in the organization's present strategy. The gap indicates that the past is only partially incorporated into the present strategy: there is not complete continuity. Historical rupture This is typically emphasized by managers dealing with crises, for instance radical technological disruption or performance deficits. Historical rediscovery Another form of change is that which rediscovers the old culture, or at least parts of it. This often comes after some kind of strategic failure. In the downward movement, the organization tries to rediscover valuable elements of the old culture after deviating from the original track. Geographical influences Differentiate cultures on 2 dimensions: Attitude towards people, either independence or interdependence: independence implies individualism rather than group orientation Attitude towards change, either flexibility or stability: flexibility implies a preference for adaptability over consistency. Field influences An organizational field is a community of organizations that interact more frequently with one another than with those outside the field and that have developed a shared culture. Three concepts are useful: 1. Categorisation: The ways in which members of an organizational field categorize themselves and their activities have significant implications for what they do. 2. Recipes: A recipe is a set of assumptions, norms and routines held in common within an organizational field about the appropriate purposes and strategies of field members. 3. Legitimacy: Is concerned with meeting the expectations within an organizational field in terms of assumptions, behaviors and strategies. Organizational culture Composed of many different elements: 1. Values may be easy to identify in terms of those being formally stated. It is important to uncover underlying, perhaps taken-for-granted values that can help explain the strategy actually being pursued by the organization. 2. Beliefs are more specific and can be shown in how people talk about issues the organization faces.  3. Behaviors are the day-to-day ways in which an organization operates. May become taken-for-granted. However, routinized behaviors can be significant barriers to achieving strategic change. 4. Taken-for-granted assumptions are the core of an organization's culture which we refer to as the paradigm. The paradigm is a set of assumptions held in common and taken for granted in an organization. Can be a problem when major strategic change is needed. Analyzing culture: the cultural web The cultural web shows the behavioral, physical and symbolic manifestations of a culture that inform and are informed by the taken-for-granted assumptions, or paradigm, of an organization. 1. The paradigm is the core. 2. Rituals and routines point to the repetitive nature of organizational cultures. Routines → “the way we do things around here”, difficult to change. Rituals are particular activities that highlight what is important in the culture, such as training programmes, promotion. 3. Stories being told by members to outsiders can be a way of letting people know what is important in the organization. 4. Symbols are objects, events or acts that maintain or create meaning above their functional purposes. Office furniture and layouts, cars and job titles. 5. Power was defined as the ability of individuals or groups to persuade or coerce others into following certain courses of action. Most powerful individuals are likely to be closely associated with the paradigm. 6. Organizational structures are the roles and responsibilities in organizations. Likely to reflect power structures and how they manifest themselves. 7. Control systems are the formal and informal ways of monitoring and supporting people within the organization. Include measurements and reward systems. Strategic drift Is the tendency for strategies to develop incrementally on the basis of cultural influences, failing to keep pace with a changing environment. Strategic drift emerges when the rate of environmental change starts to outpace the rate of the organization's strategic change. 4 main reasons why it is hard to avoid strategic drift: 1. Uncertainty, not easy to see. Takes time to be sure of the direction and significance of environmental changes. 2. Path dependency and lock-in. Capabilities that have historically been the basis of competitive advantage can be difficult to abandon to develop new and untested capabilities. Old capabilities can become core rigidities, rather than core competencies. 3. Cultural entrenchment. The paradigmatic set of taken-for-granted assumptions may prevent managers from seeing certain issues: organizational identities can shape views of environmental opportunities and threats. 4. Powerful people, whose skills and power relate to the old strategy, may resist change. Chapter 11 - Entrepreneurship and innovation Entrepreneurship Is a process by which individuals, start-ups or organizations identify and exploit opportunities for new products or services that satisfy a need in the market, Opportunity recognition Means recognising an opportunity, circumstances under which products and services can satisfy a need in the market or environment. This involves 3 important and interdependent elements: the entrepreneur of the entrepreneurial team, the environment and resources & capabilities. The entrepreneur or team. Drives and integrates the various parts of an entrepreneurial process including scanning and spotting trends in the environment, linking these to existing resources and capabilities or acquiring appropriate ones and recombining them. Environmental trends and marketplace gaps Building on macro trends and possible marketplace gaps is likely to be central in identifying an opportunity. Pestle Analysis and linking them to specific customer needs that are currently not satisfied. Ex: Run Keeper. Resources and capabilities VRIO, value chain, activity systems. For small start-ups, the necessary resources and capabilities draw upon the knowledge and experiences and competences of the people involved. Entrepreneurial process steps The steps do not necessarily neatly follow on from each other and typically include setbacks along the way. The process thus often involves continuous experimentation and the original business itself may evolve quite radically. Example: Starbucks started off selling espresso maker & coffee beans. Stages of entrepreneurial growth Often seen as going through 4 growth stages. The entrepreneurial life cycle progresses through start-up, growth, maturity and exit. 1. Start-up. One key challenge at this stage with implications for both survival and growth is sources of capital. Venture capitalists are specialized investors in new ventures and insist on a seat on the ventures board of directors. 2. Growth. A key challenge is management. Have to be ready to move from doing to managing which typically occurs as the venture grows beyond 20 employees. 3. Maturity. The key challenge is retaining their enthusiasm and commitment and generating new growth. An important option is diversification into new business areas. 4. Exit. May consider different routes to exit: a trade sale of the venture to another company or for highly successful enterprises, an initial public offering (IPO). Social entrepreneurship Individuals and groups who create independent organizations to mobilize ideas and resources to address social problems, typically earning revenues on a not-for-profit basis  - Social mission. For instance, the Grameen bank has the end objective of reducing rural poverty, especially for women. - Organizational form. Purely non-profits, a hybrid form including some minor commercial aspects, business and profit oriented but with investors wanting both social and financial returns. - Business model. Rely on revenues earned in the marketplace. Fair-trade organizations have often become much more closely involved with their suppliers than commercial organizations. Five types of innovations 1. New goods (product innovations) 2. New methods of production (process innovation) 3. New markets 4. New sources of inputs 5. New organization Innovation dilemmas Innovation involves the conversion of new knowledge into a new product, process or service and the putting of this new product, process or service into actual commercial or other use. 3 fundamental issues 1. How far to follow technological opportunity as against market demand 2. How much to invest in product innovation rather than process innovation 3. How far to open themselves up to innovative ideas from outside Technology push or market pull Technology push view → supply-induced innovations 1. Increasing role of scientific inputs in the innovative process 2. The complexity of R&D has increased and requires long range planning (rather than flexible market orientation) 3. Innovative activities differ between sectors, industries and even firms 4. There is genuine uncertainty in the nature of the innovative process (rather than known alternatives and consequences) Problems with technology push: Market mechanisms are guiding producing (innovating) firms There is an apparent risk of technological determinism  Seems to suggest a way too simplified linear model: Science=> Applied R&D=> New products and services Market pull → market-induced innovations In many sectors, users, not producers, are common sources of important innovations. Therefore, organizations should listen in the first place to users rather than their own scientists and technologists. Assumptions 1. There exists a set of consumption and intermediate goods that satisfy different needs by the purchasers 2. Consumers or users express their preferences about the features of the goods they desire through their pattern of demand 3. With increase in income, consumers will buy more of those goods that embody desired features 4. Producers enter and realize through movements in demand and prices that there is more need for these products 5. Firms innovate and introduce new products Problems with demand-pull - Is the firm passive in this process? - What happens after the firm has realized demand? How easy can it meet the demand? 2 prominent but contrasting approaches to market pull: 1. Lead users. Principal source of innovation. In extreme sports, such as snowboarding it is leading sportspeople who make the improvements for greater performance. Then, it is the pull of market experts that is responsible for innovation. Managers need to build close relationships with lead users. 2. Frugal innovation. Involves sensitivity to poor people’s real needs. Typically emphasizes low cost, simplicity and easy maintenance. Advocates for good-enough performance and features, another perspective means that quality cannot be discounted for the poor in respect of safety concerns. Reverse innovation = where an innovation is adopted first in an emerging economy before coming to rich countries. Traditional view is the other way around. The key is to manage the balance between the extremes of technology push and market pull. Discontinuous innovation Competence-destroying innovation - either creates a new product class or substitutes for an existing product Architectural innovation, disruptive innovation Continuous innovation Competence-enhancing innovation - improvements in price/performance that build on existing know-how within a product-class Modular innovation, sustaining innovation Product or process innovation Product innovation relates to the final product (or service) to be sold, especially with regard to its features. Apple. Process innovation relates to the way in which this product is produced and distributed, especially with regard to improvements in cost or reliability. Zara. New developing industries typically favor product innovation, as competition is still around defining the basic features of the product or service. Maturing industries typically favor process innovation, as competition shifts towards efficient production of a dominant design of product or service. Attacker’s advantage & Innovator’s Dilemma AA: Foster (1986) observed that in times of discontinuous technological change, incumbent firms are disadvantaged relative to new entrants (“attackers”) who are the ones bringing in new technology. ID: Innovating too much to meet your customers' needs may be harmful. Logic of Disruptive innovation Sustaining innovation - An innovation that does not affect existing markets. – Maintaining a rate of improvement, giving customers (value network) something more or better of the attributes of the product they already value. Disruptive innovation - An innovation that creates a new market by applying a different set of values, which ultimately (and unexpectedly) overtakes an existing market. – Introduces a different package of attributes from the one the value system have traditionally valued (actually may perform worse on some of those parameters, e.g. storage capacity) – Enter through niches – May look financially unattractive for incumbents Open or closed innovation Open innovation involves the deliberate import and export of knowledge by an organization in order to accelerate and enhance its innovation. Crowdsourcing is an increasingly popular form of open innovation and means that a company or organization broadcasts a specific problem to a crowd of individuals or teams, often in tournaments with prizes awarded to the best solution. Why open innovation? Innovation cost Innovation lead time Internationalization of innovation Innovation ecosystems Consist of a group of mutually dependent and collaborative partners that need to interact to innovate and create value for all. Apple’s ecosystem of apps around the iPhone, for example, benefit both them and app developers that get the benefit of a large and often lucrative market. The balance between open and closed innovation depends on 3 key factors: 1. Competitive rivalry. In highly rivalrous industries, partners are liable to steal innovations. Closed innovation is better. 2. One-shot innovation. Open innovation works best where innovation is more continuous, so encouraging more reciprocal behavior over time. 3. Tight-linked innovation. Where technologies are complex, open innovation risks introducing inconsistent elements, with knock-on effects. Innovation diffusion Diffusion is the process by which innovations spread among users. The pace of diffusion Is influenced by a combination of supply-side and demand-side factors, over which managers have considerable control. On the supply-side, pace is determined by: - Degree of improvement in performance above current products that provide incentive to change. - Compatibility. For instance, smartphones become more attractive with more apps. - Complexity, either in the product itself or in the marketing methods could discourage consumer adoption. Simple pricing structures accelerate adoption. - Experimentation. The ability to test products before commitment to a final decision. Such as free initial trial periods. - Relationship management. How easy it is to get information, place orders and receive support. On the demand-side, simple affordability is key. Other factors that can drive the pace of diffusion: - Market awareness. - Network effects. Facebook. - Customer propensity to adopt. Innovations are typically targeted at early-adopter groups (young and wealthy). Will then encourage other groups. The diffusion S-curve Reflects a process of initial slow adoption of innovation, followed by a rapid acceleration in diffusion, leading to a plateau representing the limit to demand. Tipping point - where demand for a product suddenly takes off, with explosive growth. Tripping point - the opposite of the tipping point, referring to when demand suddenly collapses. The S-curve is a useful concept to help managers avoid simply extrapolating next years sales from last year's sales. Innovators and imitators First-mover advantages and disadvantages A first-mover advantage exists where an organization is better off than its competitors as a result of being first to market with a new product, process or service. Advantages: - Network effects suggest that a customer of a product or service has a positive effect on the value of that for other customers and, if they are present and captured by an individual firm, it may be very difficult, if not impossible, for late entrants to catch up and build their own network of customers - Experience curve benefits apply to first movers, as their rapid gain of experience with the innovation gives them greater expertise than late entrants. - Scale benefits. - Reputation. - Buyer switching costs. A fast second strategy involves being one of the first to imitate the original innovator and thus building an ‘early mover advantage. → Most appropriate response to innovation. Factors that needs to be considered when choosing between innovating and imitating: Capacity for profit capture: The importance of innovators to capture for themselves the profits of their innovation. Complementary assets: The possession of assets or capabilities necessary to gain an advantage. For example, the possession of assets or capabilities necessary to scale up the production and marketing of the innovation. Fast-moving arenas: Where markets or technologies are moving very fast and especially where both are highly dynamic, first movers are unlikely to establish a durable advantage. The incumbent’s response The challenge for incumbents is disruptive technology. A disruptive innovation creates substantial growth by offering a new performance trajectory that, even if initially inferior to the performance of existing technologies, has the potential to become markedly superior. How to be responsive to potentially disruptive innovations? 1. Develop a portfolio of real options. Companies that are most challenged by disruptive innovations tend to be those built upon a single business model and with one main product or service. Establishing an R&D team in a speculative new technology. 2. Corporate venturing. New ventures divisions which can nurture new ideas with a longer-term view. 3. Intrapreneurship. Companies can thus encourage employees throughout the organization to be creative and develop entrepreneurial ideas as part of their regular job. Technological capabilities Technology strategies Technology leadership Cost focus Broad scope Technology sourcing Technology activities Product launching Patenting Problem-solving Week 39 Literature: - Chapter 6, 8, 9, 10 and 12 in the course book + 6 articles Chapter 6 - Purpose and Stakeholders Purpose is concerned with the value an organization seeks to create for its stakeholders, potentially including both financial and non-financial forms of value. It defines what a strategy is for, what the organization is trying to achieve. Stakeholders are those individuals or groups that depend on an organization to fulfill their own goals and on whom, in turn, the organization depends. 1. Organizational values These are the underlying and enduring ideals, beliefs and principles that guide an organization's strategy and define the way that the organization should operate. Values shape the fundamental direction of strategy, providing the guiding light for what is appropriate for the organization as a whole. Values are key drivers for strategy. Two sets of institutional norms are particularly influential on the values of contemporary organizations: - SDG (Sustainable Development Goals) - EDI (Equality, diversity and inclusion) Stakeholder groups Organizational values are derived from the organization's stakeholders. - Economic stakeholders. Including suppliers, customers, distributors, banks and owners (shareholders). The values are typically economically oriented, concerned for profits. May also opt for social values, such as for net-zero greenhouse gas emissions. - Social/political stakeholders. Including policy-makers, local councils, regulators and government agencies. Values are complex and diverse. - Technological stakeholders. Key adopters, standard agencies (such as apps for mobile phones). Values such as innovation and information-sharing are important. - Community and society stakeholders. Social values. - Internal stakeholders. Specialized departments, local offices or employees at different levels. Both social and economical value in the particular part of the organization in which they work. Stakeholder mapping identifies stakeholder power and attention in order to understand strategic priorities. The power/attention matrix classifies stakeholders in relation to the power they hold and their attention to particular strategic issues. Power - the ability of individuals or groups to persuade, induce or coerce others into following particular strategies. Attention - refers to how closely stakeholders monitor the activities of an organization. In assessing the attention that stakeholders are likely to play, consider 3 factors: 1. Criticality - pay more attention to issues that are critical for them. 2. Channels - pay more attention if there are good channels for information and communication. 3. Cognitive capacity - sometimes stakeholders simply do not have the cognitive capacity to process all the information they have. Owners Typically key stakeholders in strategic decisions. Their power and attention can vary according to different ownership models. Horizontal axis - management from professional to personal Vertical axis - the extent to which organizational values are focused on profit as an exclusive goal or on profit as just one of a mix of values. 4 main ownership models: 1. Publicly quoted companies. Most important ownership model in economies such as the US and Europe. 2. State-owned enterprises. Brazil, China & Russia. 3. Entrepreneurial businesses, owned and controlled by their founders. 4. Family businesses. Important to understanding the relationship between ownership & strategies - otherwise easy to be surprised by competitors with different priorities to your own. 2. Organizational purpose Purpose becomes strategic when it is incorporated into the mission, vision and objectives of the organization. Social responsibility The regulatory environment may determine an organization's minimum obligations towards its stakeholders. CSR (Corporate Social Responsibility) is the commitment by organizations to behave ethically and contribute to economic development while improving the quality of life of the workforce and their families as well as the local community and society. Different organizations take different approaches to CSR, four basic types: 1. Laissez-faire. Organizations should be let alone to get on with things on their own account. There is no direct responsibility to any other stakeholders beyond what is prescribed in the law. Only financial performance. 2. Enlightened self-interest. CSR makes good business sense. Higher goals than profit. 3. Forum for stakeholder interaction. Incorporates multiple stakeholder interests. Performance is often measured by the triple bottom line - social and environmental benefits as well as profits. 4. Shaper of society. Financial considerations as secondary importance. Such as social movements and charities. Social role, not profits. Financial only important to continuing the social mission. Hybrid organizations Combine values and structures that would not normally go together. They manage these combinations in the virtuous circle model. This is shown in the shared value approach. Strategy is set to serve both social and financial objectives at the same time. Financial objectives need to serve social objectives. The more profits Cafédirect makes, the more it can give to its coffee growers. Creating shared value: 1. Reconceiving products & markets - food companies might redefine their products as about health rather than taste. 2. Redefining productivity in value chain - reducing both cost and carbon emissions by sourcing locally rather from far away 3. Building local communities - improve workforce skills by investing in local education facilities Another way is the dynamic balance model which fits where social and financial objectives conflict with each other. A wavy arrow labeled, strategy runs between the two goals to the right. 3. Organizational governance Governance is concerned with the structures and systems of control by which managers are held accountable to those who have a legitimate stake in an organization. Managers and stakeholders are linked together by the governance chain. The governance chain shows the roles and relationships of different groups involved in the governance of an organization. We analyze the relationships in the principal-agent model. Here, ‘principals’ employ ‘agents’ to act on their behalf, just as homeowners pay estate agents to sell their homes. Classically, the principal is simply the owner and the agent is the manager. The governance issues in principal-agent theory: Knowledge imbalances. Agents typically know more than principals about what can and should be done. After all, it is they who are actually doing the job and they have presumably been hired for their expertise. Monitoring limits. It is very difficult for principals to closely monitor the performance of their agents. This limit is made worse because principals usually have many investments, so their attention is likely to be split several ways. Misaligned incentives. Unless their incentives are closely aligned to principals’ interests, agents are liable to pursue other objectives that reward them better. Principals might introduce bonus schemes in order to incentivise desired performance, but then agents may game the system: for example, they might use their superior knowledge to negotiate bonus targets that are, in reality, easy to meet. Chapter 8 - Business strategy and models Strategic Business Unit (SBU) = supplies goods or services for a distinct domain of activity (called divisions). Business strategies 1. Competitive strategy, cost leadership, differentiation 2. Interactive strategy, interaction with competitors, including choices between competition and cooperation → Business models → value creation, value configuration & value capture Competitive strategies Concerned with how a company achieves competitive advantage in its domain of activity. Competitive advantage is about how a company, business unit or organization creates value for its users both greater than the costs of supplying them and superior to that of rivals. A company’s profitability is greater than the average profitability of all companies in its industry. Sustained competitive advantage - exists when a company maintains its competitive advantage over a number of years. Gaining competitive advantage: 1. Lower costs than its competitors (cost advantage) 2. Differentiated products from competitors so that it can charge higher prices (differentiation advantage) Competitive generic strategies 1. Cost-leadership strategy (broad target) Involves becoming the systematically lowest-cost organization in a domain of activity. RyanAir. Drivers: - Input costs → labor or raw materials. - Economies of scale. - Economies of learning. Cost leaders have 2 options: - Parity (equivalence) to competitors in product features valued by customers. Allows to charge the same prices, and the cost advantage into extra profit. - Proximity to competitors in terms of features. Close to competitors' features, customers may only require small cuts in prices to compensate for the slightly lower quality.  2. Differentiation strategy (broad target) Involves uniqueness along some dimension that is sufficiently valued by customers to allow a price premium. Drivers: - Product & service attributes. Dyson. - Customer relationships. Customer service. Marketing & reputation, brand image. - Complements. Build on linkages to other products. App Store, free of charge. 3. Focus strategy (narrow target) Targets a narrow segment or domain of activity and tailors its products to the needs of that specific segment to the exclusion of others. Two variants - cost or differentiation. The focuser achieves competitive advantage by serving its target segments better than others that are trying to cover a wider range of segments. Cost focusers identify areas where broader cost-based strategies fail because of the added costs of trying to satisfy a wide range of needs. Differentiation focusers look for specific needs that broader differentiators do not serve so well. Focus on one particular need → specialist knowledge & technology etc. Drivers: - Distinct segment needs. - Distinct segment value chains. Difficult or costly for rivals to construct. - Viable segment economics. Segments can easily become too small. Features of Cost Leadership & Differentiation Strategies Hybrid strategy Combine different generic strategies (cost & differentiation), possible under certain conditions. Often grounded in one basic generic strategy and then supplemented with another. Example: IKEA, low cost with differentiated Scandinavian design. Blue Ocean Strategy A strategy that combines both differentiation and cost-leadership activities. Find new market spaces where competition is minimized, avoid red oceans. Represent: Untapped market space, creation of additional demand & opportunities for highly profitable growth. To redefine its market and create new business-level strategy, a company must: eliminate factors that rivals take for granted, and reduce costs. reduce certain factors below industry standards and lower costs. raise certain factors above industry standards, and increase value. create factors that rivals do not offer, and increase value. Critical success factors (CSF) are factors that either are particularly valued by customers or provide a significant advantage in terms of cost. Likely to be an important source of competitive advantage /disadvantage. Value innovation is the creation of new market space by expelling on established critical success factors on which competitors are performing badly. Interactive strategies 1. Threat Assessment. No price war, more sophisticated response. 2. Differentiation response. If increased differentiation is not possible, then more radical cost solutions should be sought. 3. Cost response. Merger with other high-cost organizations may help reduce costs and match prices through economies of scale. If a low-cost business is synergistic with (in other words, has benefits for) the existing business, this can be an effective basis for an aggressive cost-based counter-attack. Game Theory When to compete and when to cooperate. It encourages an organization competitor’s likely moves and the implications of these moves for its own strategy. Game theorists often advise a more cooperative approach than head-to-head competition. Particularly relevant where competitors are interdependent = exists where the outcome of choices made by one competitor is dependent on the choices made by other competitors. For example, the success of price cuts by a retailer depends on the responses of its rivals: if rivals do not match the price cuts, then the price-cutter gains market share; but, if rivals follow the price cuts, nobody gains market share and all players suffer from the lower prices. Provides key insights into nature and determinants of interactions among competitors: a) Competition and Cooperation - show conditions where cooperation is more advantageous than competition b) Detterence - changing the payoffs in the game in order to deter a competitor from certain actions c) Commitment - deployments of resources that give credibility to threats  d) Signaling - communication to influence a competitor’s decision. Problems of game theory: - Able to explain past competitive behavior - weak in predicting future behavior - Lack of an integrated general theory - many different models → outcomes highly sensitive to small changes in assumptions Prisoner’s dilemma If they both refuse to divulge, they can both get away with the lesser punishment; on the other hand, if one is sure that the other will not betray, it makes even more sense to betray the loyal one as that allows the betrayer to go totally free. The two prisoners are clearly interdependent. Business models A business model describes a value proposition for customers and other participants, an arrangement of activities that produces this value, and associated revenue and cost structures. While competitors may share business models, their business strategy can still differ. Multi dimensions of value In many increasing returns industries, the value of a technology is strongly influenced by: - Technology’s standalone value → the functions, aesthetic qualities, ease of use - Network externality value. The availability of complementary goods, the technology's installed base A new technology that has significantly more standalone functionality than the incumbent technology may offer less overall value because it has a smaller installed base or poor availability of complementary goods. E.g., NeXT Computers were extremely advanced technologically, but could not compete with the installed base value and complementary good value of Windows-based personal computers. → A technology with a large installed base attracts developers of complementary goods; a technology with a wide range of complementary goods attracts users, increasing the installed base. How to successfully overthrow an existing dominant technology? - Must offer dramatic technological improvement - Compatibility with existing installed base and complements Value creation, configuration & capture Value creation - proposition that addresses a specific customer segment’s needs and problems. A key part of a business model describes what is offered and how value is created for the parties involved. Value configuration - of the resources and activities that produce this value. For example, technology, equipment / brands. Explains what activities create value, but also how they are linked and what participants perform them. Value capture - explains revenue streams and cost structure that allow the organization and other stakeholders to gain a share of the total value generated. How the value created will be apportioned between the organization and other stakeholders. Platform vs Pipeline Businesses Platform Business: Enables interaction between producers and consumers. Its overarching purpose is to enable matches among users. Provides infrastructure and sets governance conditions. Pipeline Business: Linear transformation through the value chain. Research and development, then design, then manufacture, then sell. Platform ecosystems In a platform ecosystem, some core part of a product (such as a video game console) mediates the relationship between a wide range of other components or complements (for example, video games, peripherals) and prospective end-users. A platform’s boundaries can be well-defined with a stable set of members or amorphous and changing. The success of all members of the ecosystem depends in part upon the success of other members. Members often invest in co-specialization or exclusivity agreements Business model patterns - Razor and blade. Most well-known, primary focus on the value capture component. Gilette’s classic model, cheap razor but pricey blades. Selling 2 interlinked products separately.  - Freemium. Offered for free and eventually convince customers to buy premium services. Grammarly. LinkedIn. - Peer-to-peer (P2P). Focus on sustainability, cooperation among individuals aided by an app. Multi-sided platforms and strategies Brings together two or more distinct, but interdependent groups of participants to interact on a platform. Facebook. Separate functions on the platform, but of value to each group of participants only if the other group is also present. Youtube. Network effects → the more participants, the better for everyone on the platform. Chapter 9 - Corporate Strategy Scope is one of the most fundamental questions in strategic management and concerns how firms should adjust in order to grow or contract in anticipation, or react to environmental turbulence such as COVID. Business strategy = concerned with how a firm competes within a particular market Corporate strategy = concerned with where a firm competes, the scope of its activities The dimensions of scope: - Vertical scope - Geographical scope - Product scope Concerned with: How far an organization should be diversified in terms of: products & markets. Parenting advantage = the value-adding effect of head office to individual SBUs that make up the organization's portfolio Strategy directions An organization starts in box A and may choose between penetrating still further within box A or increasing its diversity along the 2 axes (markets or products) Diversification involves increasing the range of products or markets served by an organization. Can do both → Box D. Unrelated diversification involves moving into products or services with no relationships to existing businesses. Related diversification involves expanding into products or services with relationships to the existing businesses (box B or C).  A) Market penetration Implies increasing share of current markets with the current product range. The scope is the same. May face 3 barriers: 1. Retaliation from competitors. 2. Legal constraints. 3. Economic constraints. Market downturn. C) Market development (related diversification) Involves offering existing products to new markets. 2 basic forms: 1. New users. 2. New geographies. B) Product and service development (related diversification) Organizations deliver modified or new products to existing markets. High risk because: 1. New resources & capabilities. New processes or technologies that are unfamiliar to the organization. Involves heavy investments - project failures. 2. Project management risk. Risk of delays & increased costs. D) Unrelated diversification Is when an organization expands into markets, products and services completely different from its own. Motives: pure growth desires or risk diversification. Diversification and performance Related diversification is advantageous → resources, capabilities & technologies are familiar. Offers greater synergies. Types of relatedness between businesses Economies of scope in diversification derive from two types of relatedness: Operational Relatedness—synergies from sharing resources across businesses (common distribution facilities, brands, joint R&D) Strategic Relatedness—synergies at the corporate level deriving from the ability to apply common management capabilities to different businesses. Diversification drivers, value-creating. Advantages from Diversification Economies of scope: - Exploiting economies of scope. Cost savings that can be achieved through sharing inputs, distribution. Economies of scope may apply to both tangible resources, such as halls of residence, and intangible resources and competences, such as brands or staff skills. - Stretching corporate management capabilities. The dominant logic is the set of corporate-level managerial capabilities applied across the portfolio of businesses. Economies from internalizing transactions: - Exploiting superior internal processes. Diversified firms can avoid external transactions by operating internal capital and labor markets. - Increasing market power. Better information on resource characteristics than external markets. Profitability can be increased → 1) Transfer competencies between business units in different industries. 2) Leverage competencies to create business units in new industries. 3) Share resources between business units to realize synergies. 4) Use Product Bundling 5) General organizational competencies that increase the performance Where diversification creates value, it is described as “synergistic”. Synergies are benefits gained where activities or assets complement each other so that their combined effect is greater than the sum of the parts. (2+2 = 5) 1) Transferring competencies Taking a distinctive competency developed by a business unit in one industry and implanting it in a business unit operating in another industry. The distinctive competency being transferred must have a real strategic value. Commonality: Skill or competency that when shared by two or more business units allows them to operate more effectively and create more value for customers. This will increase profitability when they: lower the cost structure of one or more of a diversified company’s business units. enable one or more of its business units to better differentiate their products 2) Leveraging competencies Taking a distinctive competency developer by a business unit in one industry and using it to create a new business unit in a different industry. Company’s competitive advantage in one industry being applied to create a differentiation. Cost-based competitive advantage for a new business unit in a different industry. 3) Sharing resources and capabilities Economies of scope: Synergies that arise when one or more of a diversified company’s business units are able to lower costs or increase differentiation. More effectively pool, share, and utilize expensive resources or capabilities Sources of cost reductions: Sharing lowers the cost structure Marketing function creates the differentiation of products leading to a higher ROIC 4) Product Bundling Providing products that are connected to each other  Allows companies to expand their range providing customers a complete package Goal - Bundle products to offer customers: lower prices. superior set of services. Does not always require joint ownership, can be achieved through market contracts 5) General organizational competencies Help business units within a company perform at a higher level than it could if it operated as a separate or independent company Results from the skills of a company’s top managers Types: Entrepreneurial capabilities Organiz