Wednesday, January 30 Agenda

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Wednesday, January 30 - Agenda

• Case 1 reprise
• Chapter 3 reprise
• - overview of strategic management process
• - general environment analysis, an important
  tool for external assessment
• Chapter 4
• - more tools for external and internal
  assessment prior to strategy development

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• Overview of the Harvard approach introduction to
  tools used in this framework
• mission statement
• external analysis (? opportunities/threats, key
  success factors)
• internal analysis (? strengths/weaknesses,
  distinctive competencies)
• SWOT analysis
• formulation to achieve external strategic fit
• implementation to achieve internal strategic fit

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Strategic Management Process (Harvard)
Mission ?
? 1.External analysis 2. Internal
analysis (identify opportunities (identify
strengths threats in the industry)
weaknesses of the org) key success factors
distinctive competence ?
? Strategy ? ? 4. Social
responsibility 3.Managerial
values ? Strategy Implementation ? Competitive
Advantage Above-Average Returns
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Starbucks
Establish Starbucks as the premier purveyor of
the finest coffee in the world while maintaining
our uncompromising principles while we grow.
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Hitting a home run in strategic management
1. What MIGHT we do? - considering the
external environment 2. What CAN we do?
- considering the internal environment 3. What
DO WE WANT to do? considering managerial
values 4. What SHOULD we do?- considering
social responsibility
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Starbucks 6 Guiding Principles

• Provide a great work environment and treat each
  other with respect and dignity.
• Embrace diversity as an essential component in
  the way we do business.
• Apply the highest standards of excellence to the
  purchasing, roasting and fresh delivery of our
  coffee.
• Develop enthusiastically satisfied customers all
  of the time.
• Contribute positively to our communities and our
  environment.
• Recognize the profitability is essential to our
  future success.

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Strategic Management ToolsMission Statement

• External Analysis
• general environment analysis (R3.1)
• basic industry facts
• 5 forces analysis (R4.1)
• competitive intelligence (R4.4)
• key success factors

• Internal Analysis
• identification of resources and capabilities
  (R3.1)
• value chain analysis (R4.5)
• core competencies and sustainable competitive
  advantage (R4.2, R4.3)

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The general environment analysis
(macro-environment analysis) -

• a critical tool for EXTERNAL ANALYSIS
• identify relevant trends in each segment of the
  general (macro-) environment demographic,
  economic, socio-cultural, political-legal,
  technological, global (note similarity to
  Andrews list, Fig.2, pg. 79)
• interpret potential implications of the trends
• identify emerging (forward-looking) opportunities
  and threats in the industry

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The (multi-layered) External Environment
Figure 2.1
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General Environment Analysis - Thinking Probes

• Demographic Trends
• population size
• age structure
• geographic distribution
• ethnic mix
• income distribution
• household composition
• . . . .

• Sociocultural Trends
• women in workforce
• workforce diversity
• habits, values, attitudes, beliefs
• life goals/motives
• hobbies, activities
• lifestyle trends
• consumer behavior

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General Environment Analysis - Thinking Probes

• Economic Trends
• inflation rates
• interest rates
• unemployment rates
• budget or trade deficits or surpluses
• exchange rates
• savings rate
• GNP GDP

• Political-Legal Trends
• anti-trust laws
• taxation
• labor laws
• regulatory issues
• impending legislation

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General Environment Analysis - Thinking Probes

• Technological Trends
• product innovation
• communication advances
• process innovation
• cost and speed
• diffusion
• focus of public and private expenditures

• Global Trends
• key political events
• critical global markets
• newly industrialized countries
• varying cultural and national attributes
• political instability
• trade barriers

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Use of GENERAL ENVIRONMENT ANALYSIS

• Understand broad factors likely to impact your
  industry now and in the future.
• Realize that the individual firm has little if
  any control over these broad trends
• Thus, firms must ADAPT to important general
  environment trends.
• Consider resulting opportunities and threats.
• Look for intersecting/parallel trends that can be
  subtle yet ultimately profound.
• Anticipate! Place your bets for the future!

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CHAPTER 4

• More tools to use in the Harvard approach
• to strategic management
• basic industry facts
• Porters five-forces of competition (R4.1)
• competitive intelligence (R4.4)
• evaluation of industry attractiveness
• role of core competencies in creating sustainable
  competitive advantage (R4.2)

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The (multi-layered) External Environment
Figure 2.1
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Basic industry facts

• Main competitive arena for the industry
• local? regional? national? global?
• Stage of industry life cycle ?
• Industry growth rate ?
• Market structure
• fragmented? consolidated?
• Average industry profit margin ?

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Basic industry facts where to get??? -

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Michael Porter (R4.1)How Competitive Forces
Shape Strategy

• The essence of strategy formulation is coping
  with competition.
• Competitive forces go beyond established rivals
  look at five types of competition.
• A strong set of competitive forces reduces profit
  potential.
• Seek a position of power over (or reduced
  vulnerability to) competitive forces.

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Porters five forces analysis

• WHO might be a threat in each of the five
  categories of competition?
• HOW STRONG is each of the five competitive
  forces?
• WHAT CAN THE FIRM DO ABOUT IT? - use defensive
  and/or offensive actions.

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1. New entrants . . .

• can increase competition by adding new capacity
  and aggressively pursuing (stealing) market
  share.
• are discouraged by entry barriers, or obstacles
  to enter the industry.
• existing players want ______entry barriers.

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Common entry barriers

• economies of scale
• proprietary product differences
• brand identity/brand loyalty
• switching costs
• capital requirements
• distribution channels
• government or regulatory policies
• expected retaliation
• low industry profits

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To analyze threat of entry

• you MUST analyze relevant entry barriers.
• also consider possible entry by established
  players from other industries.

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2. Substitutes . . .

• are products offering a different way of
  satisfying a similar need or want.
• often are provided by firms in a different
  industry.
• are NOT THE SAME as rivals
• Burger King vs. McDonalds rivals
• Burger King vs. grocery store substitutes.

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To analyze threat from substitutes

• consider the price-performance tradeoff of
  switching to the substitute.
• consider consumer switching costs.
• consider relevant environmental trends.

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3. Supplier power is high when

• supplies are crucial to product success and hard
  to get.
• very few suppliers exist.
• one supplier is relied upon.
• switching costs for the purchasing firm are high.
• suppliers might integrate forward.

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4. Buyer power increases with . .

• consumer bargaining leverage, from
• - institutional buyers
• - informed buyers
• - many choices
• - low switching costs
• - backward integration
• high levels of price sensitivity
• low levels of brand loyalty

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5. Rivalry

• is usually the strongest of the five competitive
  forces.
• is especially strong when
• - the industry is mature, with slow growth.
• - industry over-capacity exists.
• - consumers lack loyalty.
• - high exit barriers (economic, strategic,
• and/or emotional) are present.

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Advice from Porter

• Navigate the industry structure defined by
  basic industry facts and the five forces of
  competition via
• - selection of competitive position,
• - influencing the competitive forces,
• - exploiting industry change.

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Competitive intelligence

• Learn as much as possible about youre your close
  rivals.
• Understand their current strategy, strengths and
  weaknesses, future goals, assumptions, and
  leadership attributes.
• Anticipate likely competitive responses.
• WHY??? HOW??? WHEN???

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Framework for analyzing direct rivals

• Future goals Current strategies
• ? ?
• Competitors
• Response
• Profile
• ? ?
• Assumptions Capabilities

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Henderson (R4.4)Competitive Maneuvering

• Involves business power games
• Strategy ploy
• Main point
• Behavior of business is not always logical.
• A critical (and often overlooked) factor is
  individual/organizational emotion.

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Useful ideas from Henderson

• Know rivals stakes, character, attitudes,
  motives, and habits.
• Provide little information about your firm.
• Always assess perceptions - you of them, them of
  you.
• Dont arouse rivals emotions.
• Avoid use of overwhelming force.
• Value friendly competition.

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More advice from Henderson

• Make sure rivals know benefits of cooperating and
  costs of not cooperating.
• Use diplomacy - the art of being unreasonable
  without arousing resentment.
• Be arbitrary - to a point. The less arbitrary
  you seem, the more arbitrary you can be.
• If youre not willing to accept punishment, and
  your opponents know it, youll almost certainly
  be punished!

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Drawing conclusions about industry
attractiveness, using your overall external
analysis Consider -

• opportunities vs. threats?
• major uncertainties/risks?
• intersecting general environment trends?
• average industry growth rate?
• average industry profit margins?
• power of the five competitive forces?

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Challenges of external analysis . . . Dealing
with . . .
the known, the unknown the known known the
unknown known the known unknown, the unknown
unknown . . . Patrick Traynor, and the Dakota
Medical Foundation strategic planning process
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Two levels of analysis involved in Harvard
method of strategy formulation

• 1. Industry level - the external environment.
• - look for opportunities and threats tools
  general environment analysis, basic industry
  facts, Porters five-forces of competition,
  competitive intelligence, key success factors
• 2. Company level - the internal environment. -
  look for strengths and weaknesses tools
  resource/capability assessment, financial
  analysis, value chain analysis, distinctive
  (core) competencies . . .

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Use of INTERNAL ANALYSIS

• Identify important resources (tangible and
  intangible - what you have) and capabilities
  (what you can do) - Andrews considers financial,
  managerial, functional, and organizational
  dimensions - Fig. 2, pg. 79
• Understand the organizations specific strengths
  and weaknesses
• Utilize unique strengths to develop strategies
  that provide sustainable competitive advantage
• Improve weak areas that are vulnerabilities

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Distinctive competencies . . .

• are especially instrumental for attaining
  competitive advantage
• consist of a combination of resources and
  capabilities that are unique, and set the
  organization apart from their competition
• advice is to base competitive strategy off ones
  distinctive competencies

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Jay Barney (R4.2) Looking Inside for
Competitive Advantage

• Attractive external environment is not the only
  explanation for success.
• Utilizing a firms distinctive competence has a
  huge role in strong performance.
• Use of internal characteristics are more
  influential for strong performance than playing
  the external context.

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4 attributes of core competencies that create
competitive advantage

• Core competencies should be
• 1. valuable - to the marketplace
• 2. rare - not prevalent in the marketplace.
• 3. difficult to imitate - use of intangible
  resources, historical advantages, ambiguous
  and/or complex competency development.
• 4. organizationally accessible - can be used!

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1. Assessing resource/capability value

• Consider extent to which specific resources
  and/or capabilities reduce costs or add to
  perceived value.
• If resources or capabilities increase costs or
  reduce perceived value, they might be
  organizational weaknesses!

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2. Assessing rareness of resource/capability

• Examine prevalence in the marketplace.
• But dont ignore resources/capabilities that are
  not rare they might be necessary regardless
  (maybe complementary resources or capabilities,
  or maybe they are key success factors).

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3. Assessing if resources/capabilities can be
easily imitated

• Work towards utmost use of any advantages from
  proprietary resources, intangible resources,
  image and reputation, unique historical
  conditions, path dependence, causal ambiguity,
  social complexity, tacit knowledge, embedded
  organizational routines, shared values, . . .

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4. Assessing organizational accessibility of
important resources/capabilities

• Is the firm organized in such a way that its
  vital resources and capabilities can be exploited
  in its strategic actions?
• Need appropriate complementary structures,
  processes, and systems to deploy the resources
  and capabilities that exist.

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Are resources/capabilities

• 1. valuable? - if no, a competitive disadvantage
  below normal performance likely.
• 2. valuable but not rare? - average to below
  average performance expected intense competitive
  battles likely.
• 3. valuable, rare, but not difficult to imitate?
  - temporary competitive advantage possible.
• 4. valuable, rare, difficult to imitate, but not
  organizationally accessible? - competitive
  advantage can be sustained over time, but
  difficult to leverage into the future.

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A paradox of distinctive competencies . .

• strategies that are difficult for other firms to
  replicate seem easy to implement due to the
  specific distinctive competencies
• this can lead to an underestimation of the value
  of core competencies, and attempts to do
  something harder or something else, which is
  often unwise

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Financial Assessment

• examines trends in financial performance over
  time (gt 2 years)
• analyzes the entries in the financial statements
  growth rates relevant s
• calculates a rich set of financial ratios
• interprets the numbers
• provides a defensible conclusion about overall
  financial situation

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Next week . . .

• Guest speaker
• Brian Johnson, Integrity Windows
• R4.5, 6.2
• Generic business-level strategies Strategic
  change
• Case
• WFNX 101.7FM Case