MM 5012 Business Strategy and Enterprise

MBA - ITB

CHAPTER 1
Strategic competitiveness is achieved when a firm successfully formulates and implements a value-creating strategy. A strategy is an integrated and coordinated set of commitments and actions designed to exploit core competencies and gain a competitive advantage. When choosing a strategy, firms make choices among competing alternatives as the pathway for deciding how they will pursue strategic competitiveness.

A strategy has five elements, providing answers to five questions: Arenas: where will we be active? Vehicles: how will we get there? Differentiators: how will we win in the market place? Staging: what will be our speed and sequence of moves? Economic logic: how will we obtain our returns?

A hierarchy of company statement Many companies do have-and all firms should have-statements of their ultimate purpose and the ethical values under which they will operate. Vision is a picture of what the firm wants to be and, in broad terms, what it wants to ultimately achieve. The mission statement is the loftiest guiding light and least specific. A mission specifies the business or businesses in which the firm intends to compete and the customers it intends to serve. As we work our way down the hierarchy, the statement become more concrete, practical, and ultimately unique. Values are what we believe in and how we will behave. No other company will have the same strategy statement, which defines the competitive advantage, or balanced scorecard, which tracks how we implement our particular strategy. Firms use the strategic management process to achieve strategic competitiveness and earn above-average returns. Strategic leaders are people located in different parts of the firm using the strategic management process to help the firm reach its vision and mission. Strategic competitiveness is achieved when a firm has developed and learned how to implement a value-creating strategy. Above-average returns (in excess of what investors expect to earn from other investments with similar levels of risk) provide the foundation a firm needs to simultaneously satisfy all of its stakeholders.

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Element of strategy statement Three critical components of a good strategy statement are objective, scope and advantage. These elements are a simple yet sufficient list for any strategy that addresses competitive interaction over unbounded terrain. Defining the objective, scope and advantage requires trade-offs, which Porter identified as fundamental to strategy. The strategic objective should be specific, measurable and time bound. It should also be a single goal. A firms scope encompasses three dimensions: customer or offering, geographic location, and vertical integration. Advantage is the most critical aspect of a strategy statement. Developing a strategy statement The creative part of developing strategy is finding the sweet spot that aligns the firms capabilities with customer needs in a way that competitors cannot match given the changing external context-factors, such as technology, industry demographics, and regulation. What is strategy? Strategy is the creation of a unique and valuable position, involving a different set of activities. Strategic positions can be based on customers needs, customers accessibility, or the variety of a companys products or services. Choosing a unique position, however, is not enough to guarantee a sustainable advantage. A strategic position is not sustainable unless there are trade-offs with other positions. Trade-offs occurs when activities are incompatible. There are three types of fit, although they are not mutually exclusive. First-order fit is simple consistency between each activity (function) and the overall strategy. Second-order fit occurs when activities are re-inforcing; and the third-order fit goes beyond activity reinforcement to what it called as optimization of effort. Strategic fit among many activities is fundamental not only to competitive advantage but also to the sustainability of that advantage. Strategic Action at Lenovo Using the Hambrick and Fredricksons innovative model of strategy, we have been able to illustrate how Lenovos top management team must focus their business strategy to remain a competitor in the PC marketplace. Arenas: the growth of hand-held devices and IT services (non-PC related) is becoming important to Lenovo in several ways. First, the PC industry is beginning to feel the heat of growing foreign competition in China. Second, the Lenovos ability to
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compete in the Greater China/ Asia-Pacific market will begin to face the prospect of new, indigenous competitors in many of these markets. Vehicles: Lenovo achieved its competency in PC distribution through joint ventures with PC original equipment manufacturers like AST, Hewlett-Packard and IBM Corp. Differentiators: the strongest distinguishing feature that Lenovo has is its ability to understand the Chinese market, its values, and preferences. Staging: Lenovo created a leveraged IT consulting/services business from its core product business. The final step in the sequence of evolution is Lenovos foray into hand-held devices. Economic logic: currently Lenovo allocates about 80% of its resources to make corporate IT and consumers PCs. As it faces more competition from other vendors, Lenovo will need to focus more resources on its fledgling IT services business.

The strategies and management initiatives that apply to Lenovo are clearly important models for other Chinese firms as well. Though most PRC firms strive to make a profit, they are also driven by longstanding government initiatives: providing jobs, producing at high volumes, and protecting the existing status quo.

CHAPTER 2
External Environmental Analysis has four parts, as shown below: Scanning Monitoring Forecasting Assessing Identifying early signals of environmental changes and trends Detecting meaning through ongoing observations of environmental changes and trends Developing projections and anticipated outcomes based on monitored changes and trends Determining the timing and importance of environmental changes and trends for firms strategies and their management

Segments of the General environment We will use the case study of Nintendos disruptive strategy: implications for the video game industry to analyze general environment (external factors).

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Political: Video games have a tendency to play with the emotions of people which in turn can threaten peace and law, a country being multicultural. Therefore Government has the authority to control the content of the video games frames. Economics: Places such as USA and Japan are largely dominated by video game business; therefore contributing towards the GDP of their countries. Demographic: Open a mass market/ beyond existing gamers or common people, such as first-time game players, women and older consumers. Even to people who are not interested in games. Age: outside the traditional range of 12-35 & family life cycle: married with children. Sociocultural: The social factors that influence the video game industry are population demographics, income distribution, lifestyle changes, social mobility, attributes to work, consumerism, level of education and consumer behavior. Technological: Nintendos role from playing cards to toys to video games and then with each console introduced, included many technological changes. The online capability of Nintendo Wii was a major change in the technology of the video game industry. Environment: The video game industry uses a lot of plastic resources. Playing games on tv or computers does consume a lot of power. On the other hand, Nintendo also facilitates the green lifestyle by creating Super Mario Sunshine and Chibi-Robo; Park Patrol, which challenges players to improve the environment around them. Legal:

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The legal issues faced by the video game industry include trademarks, copyrights, licensing, online ownership, revenue recognition and demands of intellectual property. The other issues that can be considered are product and health safety.

Industry Environment Analysis Porters (1980) competitive force model is probably one of the most often used business strategy tools and has proven its usefulness on numerous occasions. Using this model, we can undertake a structural analysis of the petrochemical industry in Saudi Arabia. 1. Threat of New Entrants (Competitors) As is frequently the case with industries that require large investments, entry into the petrochemical industry can be difficult. Cooperation with existing firms might thus be useful for a new firm to enter an international petrochemical market. Complexity and size can make petrochemical plants expensive to build and difficult to operate efficiently. Technology also inhibits market entry. With a small number of large and complex plants dominating many industry sectors, most of the petrochemical technology is licensed and proprietary. Since the industry is concentrated in relatively few hands and because petrochemical investments are usually expensive to build, access to market is limited. 2. Bargaining Power of Suppliers The suppliers in the petrochemical industry are dominated by a large number scattered around the globe. SABIC enjoys further advantages of more strategic options as suppliers from the global arena compete against each other to enter the Saudi market. Firms in Saudi Arabia have a better bargain in terms of reasonable price and obtaining greater credit facilities. However, suppliers of some critical raw materials have a high bargaining power, as they are vital for production and non-availability of these may lead to a shutdown in production. 3. Bargaining Power of Buyers (Customers)

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Saudi petrochemical companies, in particular SABIC, have numerous customers from within the nation as well as around the world, mainly the Gulf nations, Indian sub-continent, Far East, Middle East, Africa, Europe and Japan. The cause for concern is that some products, such as high pressure LDPE and LLDPE are marketed heavily in China. Such a dependence on a single country gives more bargaining power to customers, besides becoming vulnerable to the political and economic situation in China. Focusing on a single nation as a customer will pose a threats to the Saudi petrochemical industry. 4. Threat of Substitute Products Although the existing demand for petrochemical products is huge, with a number of products ranging from industrial solvent to food packaging being made from petrochemicals, environmental concerns may force a shift back to more widespread use of carbohydrates in the coming decades. These products pose a major threat of substitute. 5. Intensity of Rivalry Among Competitors Saudi petrochemical organizations are facing a number of competitors, such as Exxon Chemicals, Shell Chemicals, BASF Chemical Company, Dow Chemical, Mitsubishi, among others. These competitors are about equal in size and market power, which makes the competition too severe to survive. Since 1997 the industry growth slowed down due to the Asian financial crisis. Barriers to entry have several factors, which are: - Economies of scale - Capital Requirements - Access to Distribution Channels - Cost Disadvantages Independent of Scale - Product Differentiation - Switching Costs - Government Policy

With huge investments and complex operations, the industry is of such a nature that it makes exit barriers too high. It is also too costly to switch to another industry because there are no similar businesses. As a result of this, the intensity of rivalry among existing competitors is extreme.

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CHAPTER 3
Scanning and analyzing the external environment for opportunities and threats is not enough to provide an organization a competitive advantage. Analysts must also look within the corporation itself to identify internal strategic factors this internal scanning, often referred to as organizational analysis, is concerned with identifying and developing an organizations resources and competencies. People are an especially critical resource for helping organizations learn how to continuously innovate as a means of achieving successful growth. In general, the sustainability of a competitive advantage is a function of three factors: (1) the rate of core competence obsolescence because of environmental changes, (2) the availability of substitutes for the core competence, and (3) the imitability of the core competence. Matching what a firm can do (a function of its resources, capabilities, core competencies, and competitive advantages) with what it might do (a function of opportunities and threats in the external environment) allows the firm to develop vision, pursue its mission, and select and implement its strategies. Analyzing the Internal Organization The figure below illustrates the relationships among resources, capabilities, and core competencies and shows how firms use them to create strategic competitiveness.

Resources, Capabilities, and Core Competencies Resources, capabilities, and core competencies are the foundation of competitive advantage. Resources are bundled to create organizational capabilities. In turn, capabilities are the source of a firms core competencies, which are the basis of competitive advantages.
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Core competencies are a source of competitive advantage only when they allow the firm to create value by exploiting opportunities in its external environment. Grant Proposes a five-step, resource-based approach to strategy analysis: 1. Identify and classify the firms resources in terms of strengths and weaknesses 2. Combine the firms strengths into specific capabilities and core competencies 3. Appraise the profit potential of these capabilities and competencies in terms of their potential for sustainable competitive advantage and the ability to harvest the profits resulting from their use. 4. Select the strategy that best exploits the firms capabilities and competencies relative to external opportunities 5. Identify resource gaps and invest in upgrading weaknesses

The Port of Singapore The Port of Singapore has achieved a sustainable competitive advantage relative to other locations by carefully building a set of resources that other Ports would find very difficult to match. Some of these resources are natural (a superb sheltered harbor), some can be replicated at a significant cost (infrastructure, well-educated and hardworking labor force), and some are particularly valuable in Singapore, but less useful in other Ports (scheduling systems for multiple cranes to handle the complexity of multi-tier stacking of containers). Resource-based View (RBV) helps explain and interpret the contribution of technology to the Port of Singapore (PSA). This view of competitive advantage is based on the unique resources that a firm possesses. To the extent that a competitor cannot create or substitute for these resources, they provide an advantage to the firm that owns them. Analyzing PSAs strategy PSA supplemented limited natural resources with manmade resources, including operations and information

technology, to build one of the leading Ports in the world. These man-made resources compensated for some of the countrys natural limitations. Not all important resources are under the control of an organization, so one must (1) identify external resources that can be used to ones advantage and (2) build internal resources capable of enhancing those external resources.

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Value Chain Analysis Value chain analysis is used to identify and evaluate the competitive potential of resources and capabilities. By

studying their skills relative to those associated with primary and support activities, firms can understand their cost structure and identify the activities through which they can create value. Primary activities are involved with a products physical creation, its sale and distribution to buyers, and its service after the sale. Support activities provide the assistance necessary for the primary activities to take place.
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To be a source of competitive advantage, a resource or capability must allow the firm (1) to perform an activity in a manner that provides value superior to that provided by competitors, or (2) to perform a value-creating activity that competitors cannot perform.

Above is Henkel`s value chain activities. The primary activities are: (1) Research &Development; (2) Product safety; (3) Raw Materials; (4) Production; (5) Logistics; (6) Use: fostering sustainable consumption; (7) Usage: Industrial business; and (8) Packages & disposal. Outsourcing When the firm cannot create value in either an internal primary or support activity, outsourcing is considered. Outsourcing is needed when it relates to efficiency (priority & cost effectively) and in order to the firm can only focus on core activities. In the case study of Henkel Co., they can outsource their procurement, logistics and general supporting. If we combine the resources and the capability of Henkel, the core competency of Henkel located in both aspect: 1. Tangible = Organization: Henkel has large product portfolio. Although different competitors existed in each market from its huge products, each competitor often only served a special niche and sector. In addition, only few companies were active in as many segments as Henkel did. Therefore this is the reason Henkel was almost triple the size of its next best competitor. Furthermore, with its international expansion strategy, Henkel can rapidly grow its brand image. Henkels diverse product range and strengths ranged from modern consumer product for everyday use to complex chemical and technical system solution for industrial customer.
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2. Intangible a. Innovation: Henkel invest in R&D in big portion as shown in Exhibit 2, compare to capital expenditure, R&D expenses is around 78.8% in 2006 and in 74.4% in2007. From this data we can understandably why Henkel being the first self-acting laundry detergent in1907. b. Reputation: From reputation view, customer care of Henkel gives optimum support product enhancement, technical advice, addressing complaint and warranty support. Thus it makes Henkel receive positive image from their customer. Thus it fits to its tagline i.e. A brand like a friend. Although Henkel brand is not really familiar to customer, as not all subbrand Henkel invested to that. However customer familiar to its sub-brand likes Pritt, Patex, and Ponal. This is because their sub-brand strategy applied to product managers to develop their own marketing strategy.

CHAPTER 4 Business-Level Strategy

Business-level strategy is an integrated and coordinated set of commitments and actions the firm uses to gain a competitive advantage by exploiting core competencies in specific product markets. However, every firm may not use all the strategiescorporate-level, merger and acquisition, international, and cooperative. Customers: Their Relationship with Business-Level Strategies Customers are the foundation of successful business-level strategies. A firm simultaneously examines three issues: who, what, and how. Increasing segmentation of markets throughout the global economy creates opportunities for firms to identify more unique customer needs they can serve with one of the business-level strategies. We will analyze the case study of OASIS Hong Kong Airlines to see their business-level strategy on the First Long Haul, Low-Cost Airliner in Asia.

Who: a customer from Hong Kong that want to travel long-haul with low price. What: offering long-haul flight with low price using big airplane (Boeing 747-400)
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How: using OASIS Airline Activity System that consist of high aircraft utilization, using Boeing 747-400, using secondary airports, standard service, low fare, long-haul, using website sell ticket, low maintenance cost, and low-fare types.

The reach dimension of relationships with customers is concerned with the firms access and connection to customers. Richness, the second dimension of firms relationships with customers, is concerned with the depth and detail of the two-way flow of information between the firm and the customer. Affiliation, the third dimension, is concerned with facilitating useful interactions with customers. The Purpose of a Business-Level Strategy is to create differences between the firms position and those of its competitors. To position itself differently from competitors, a firm must decide whether it intends to perform activities differently or to perform different activities. Firms develop an activity map to show how they integrate the activities they perform. Oasis is positioning itself as the only long-haul, low-fare airline operating out of Hong Kong. Oasis offered two classes of service, which are economy and business-class passengers. It only sold one-way tickets which on the Hong Kong London route which sell for low as HK$1.000 (US$128) for an economy class seat, and HK$6.600 (US$ 846) for a business class seat, excluding axes and surcharges. The Oasis also had relatively simple, easily understood fare structure, which the customer expected customers would find appealing.

Types of Business-Level Strategies Firms choose from among five business-level strategies to establish and defend their desired strategic position against competitors: cost leadership, differentiation, focused cost leadership, focused differentiation, and integrated cost leadership/differentiation. Each
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business-level strategy helps the firm to establish and exploit a particular competitive advantage within a particular competitive scope. How firms integrate the activities they perform within each different business-level strategy demonstrates how they differ from one another.

Cost Leadership Strategy The Oasis Hong Kong Airline using focused cost leadership business strategy to be the only long-haul and low cost full service airlines. The cost leadership strategy is an integrated set of actions taken to produce goods or services with features that are acceptable to customers at the lowest cost, relative to that of competitors. As noted, cost leaders goods and services must have competitive levels of differentiation that create value for customers. Differentiation Strategy The differentiation strategy is an integrated set of actions taken to produce goods or services (at an acceptable cost) that customers perceive as being different in ways that are important to them. Through the differentiation strategy, the firm produces non-standardized (that is, unique) products for customers who value differentiated features more than they value low cost. Because of their uniqueness, differentiated goods or services are sold at a premium price. Focus Strategies The focus strategy is an integrated set of actions taken to produce goods or services that serve the needs of a particular competitive segment. Oasis focused only for customers who want to have long-haul travel using airplane, especially to Hong Kong London with low price but full service. This strategy is supported by its competitive advantages which own by the company, and the core competition is the operational activities.

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Through the cost leadership and the differentiated focus strategies, firms serve the needs of a narrow competitive segment. This strategy is successful when firms have the core competencies required to provide value to a specialized market segment that exceeds the value available from firms serving customers on an industry-wide basis. Integrated Cost Leadership/Differentiation Strategy The integrated cost leadership/ differentiation strategy involves engaging in primary and support activities that allow a firm to simultaneously pursue low cost and differentiation. Flexibility is required for the firm to learn how to use primary and support activities in ways that allow them to produce differentiated products at relatively low costs. Firms that

successfully use the integrated cost leadership/differentiation strategy usually adapt quickly to new technologies and rapid changes in their external environments. Singapore Airlines Balancing Act Its intriguing that SIA has combined the supposedly incompatible strategies of differentiationwhich it pursues through service excellence and continuous innovation and cost leadership. SIA executes Dual strategies successfully by managing: Providing Service Excellence costeffectively Being a technology leader and a follower Innovating in both centralized and de-centralized manner Achieving standardization and personalization in its processes

SIA manages its two main assets planes and people. SIA spends more than its rivals in key And it spends less, partly as a consequences, areas: on: Buying new aircraft Price per-aircraft Depreciating aircraft Fuel maintenance and repair Training Salaries Labor costs on flights Sales and administration Innovation Back office technologies Fostering Both Centralized and Decentralized innovation SIA has earned the reputation of being a serial innovator, bringing many firsts to the civil aviation industry. It follows a 4-3-3 rule of spending: 40% on training, 30% on revising processes and procedures, and 30% on creating new products and services every year. The Product Innovation Department (PID) follows a highly structured process that includes opportunity identification, concept evaluation, design and development, and launch.
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The company fosters the idea that employees must innovate if SIA is to stay ahead. Every function is responsible for improving its services, and department heads must implement new ideas out of their budgets. Being both Technology leader and Follower SIA is often the first to innovate in order to enhance the customer experience. But unlike many market leaders that innovate in every aspect of their business, SIA engages in only small improvements in functions that dont touch the customer. SIA introduced technological breakthrough to save costs. However, SIA is a pragmatic innovator, quickly stopping the use of technologies that cause problems or that customers dont like. In 2004, SIA outsourced many of its IT functionssuch as its data center and enduser computing supportso it could focus on its core business. Using Standardization for Personalization The airline institutionalizes personalization by creating a service culture through recruitment, training, and rewards. SIA personalizes the customer experience by relaying information about birthdays and preferences from its CRM system to cabin crew members. They address frequent flyers by name and know their favorite drinks and magazines. Usually, though, personalization is spontaneous. SIAs training programs such as Transforming Customer Service teach cabin crews how to anticipate customer needs and enhance employees ability to delight customers. SIA flights carry more crew members than competitors. The How-To of Dual Strategies Harness the power of your people and culture Make good use of technology Utilize the power of business ecosystems Make investment decisions strategically

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