February 11 Agenda

1
February 11 - Agenda

• Strategic management process (Andrews/Harvard
  model) key influences on strategic decisions
• Case discussion
• External analysis understanding opportunities
  and threats, and the industry playing field
• - general environment analysis
• - basic industry facts
• - Porters five-forces of competition
• - competitive intelligence
• - key success factors
• - overall industry attractiveness

2

• Overview of the Harvard approach introduction to
  tools used in this framework
• mission statement
• external analysis (? opportunities/threats, key
  success factors) - 1 4
• internal analysis (? strengths/weaknesses,
  distinctive competencies) - 2 3
• SWOT analysis
• formulation to achieve external strategic fit
• implementation to achieve internal strategic fit

Mission statement
3
Strategic management process. . .

• Formulation
• 1. Identification of opportunity and risk
• 2. Determining the companys resources
• 3. Considering organizational values
• 4. Acknowledging social responsibility

• Implementation
• 1. Organizational structure
• 2. Organizational processes and behavior
• 3. Top leadership

4
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 ? Above average returns
5
Hitting a Home Run in Strategic Management
2. What can we do? Consider company competence

1. What might we do? Consider external
opportunities
3. What should we do? Consider social
responsibility
4. What do we want to do? Consider values
6
Porter Kramer Strategic (vs. Responsive)
Social Responsibility

• Strategy and CSR can (and should) coincide.
• CSR is an opportunity for the firm.
• Look at really making a difference rather than
  just donating money.
• CSR is more than just charity work.
• Corporations can help fix social problems that
  fit their core competence.
• CSR is more effective when aimed at initiatives
  that fit the companys strengths and strategies
  create a win-win.

7
Barlett Ghosals Beyond Strategy to Purpose

• Emphasizes the value to the firm, employees, and
  society of a strong set of shared organizational
  values
• Adds motivation, pride, direction, commitment,
  belongingness, stability, autonomy, ability to
  quickly sense and respond to environment . . .

8
Mission To establish Starbucks as the premier
purveyor of the finest coffee in the world while
maintaining our uncompromising principles while
we grow.

• STRUCTURE
• STRATEGY SYSTEMS
• SHARED VALUES
• SKILLS STYLE
• STAFF

9
Starbucks managerial values anchor the firm,
vs. a firm that is hollow inside

• 6 guiding principles
• Great work environment respect/dignity
• Embrace diversity as an essential component in
  how we do business
• Highest standards of excellence in purchasing,
  roasting, and delivery of our coffee
• Enthusiastically satisfied customers always
• Positive contribution to communities
• Profitability is essential for future success

10
Goals of strategic management

• External strategic fit - match capabilities of
  the firm with opportunities in the industry
  strategy effectively adapts to external trends
• Internal strategic fit - manage internal
  resources of the firm to facilitate effective
  execution of strategy
• Sustainable competitive advantage and
  above-average returns

11
Shared managerial values vs. corporate ethics?

• Differences?
• Trends in corporate ethics?
• Issues in corporate ethics?
• Effective practice of corporate ethics?

12
Business Ethics?

• The public be damned.
• (William Henry Vanderbilt)
• Virtue has never been as respectable as money.
• (Mark Twain)
• Theres noting wrong with our business.
  Lawsuits are the probem.
• (Chairman of Manville, asbestos manufacturer)

13
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)
• interpret potential implications of the trends
• identify emerging (forward-looking) opportunities
  and threats in the industry

14
The (multi-layered) External Environment
15
Industry Company!!

• Industry example
• 1.
• 2. Automobile
• 3.

• Company example
• 1. Nieman Marcus
• 2.
• 3.

16
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

17
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

18
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

19
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!

20
The (multi-layered) External Environment
21
Basic industry facts

• Key market segments? Market size?
• Aggregate volume?
• Industry growth rate ?
• Stage of industry life cycle ?
• Main competitive arena for the industry
• local? regional? national? global?
• Average industry profit margin ?
• Relative consolidation or fragmentation?

22

• Fragmentation Consolidation
• a large number of a small number of
• small firms characterize large firms
  characterize
• the industry industry
• Look at 4-firm concentration ratio, which is
• Market share of top 4 firms in the industry
• if ? 50 , industry is quite consolidated

23
Basic industry facts where to get??? -

24
Michael PorterHow 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.

25
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.

26
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.

27
Common entry barriers

28
To analyze threat of entry

• you MUST analyze relevant entry barriers.
• high entry barriers (higher?) (lower?)
  competitive threat.
• also consider possible entry by established
  players from other industries.

29
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.

30
To analyze threat from substitutes

• consider the price-performance tradeoff of
  switching to the substitute.
• consider consumer switching costs.
• consider relevant environmental trends.
• can be insidious and very powerful.

31
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.

32
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

33
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.

34
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.

35
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???

36
Framework for analyzing direct rivals

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

37
Competitive Intelligence What to do with it?

• Play hardball! (?)
• Play curveball! (?)

38
Hardball

• The Manifesto
• Relentless focus on competitive advantage
• Extreme competitive advantage
• Avoid direct attacks
• Exploit will to win
• Know the caution zone

• The Strategies
• Devastate rivals profit sanctuaries
• Plagiarize with pride
• Deceive the competition
• Unleash massive and overwhelming force
• Raise competitors costs

39
Curveball

• Get rivals to do something dumb
• Draw rival out of profit zone
• Employ unfamiliar techniques
• Disguise your success
• Let rivals misinterpret your success

40
HendersonBrinksmanship in Business

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

41
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.

42
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!

43
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?

44
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 . . .