What is Strategy?

Operational Effectiveness is Not Strategy

 Root of the problem is the failure to distinguish between operational effectiveness and strategy
 Necessary but not sufficient
o OE - similar activities better than rivals
o Strategic - performing different activities from rivals or performing similar activities
differently
o Perfect example are the Japanese
 Most obvious reason is the diffusion of best practices
o begin to imitate one another all the relative value ends up in the consumers hands
o Basically leading to mutual destruction - the reason for mergers and acquisitions - (hmm
look for industries for these characteristics and then buy stocks that could potentially be
acquired by larger companies)
 
 
Strategy Rest on Unique Activities
 Choosing to perform activities differently or different activities altogether
 Three Sources
1. Variety Based positioning
i. Serve a wide array of customers but only meet a subset of their needs (niche
product offering)
1. Need Based positioning
i. Unique - Bessemer Trust company - no loans only for families of 5 million in
investable assets
ii. Difference in needs must be matched with a best set of practices also differs
1. Access Based positioning
i. A function of customer geography or customer scale - Carmlike Theatres only in
towns of less than 200 000, able to centralize purchasing, lower rent, single manager,
less updates on technology, word of mouth marketing
 
STRATEGY IS THE CREATION OF A UNIQUE AND VALUABLE POSITION INVOLVING A DIFFERENT SET
OF ACTIVITIES
 
Sustainable Strategic Position Requires a Trade-offs
 Trade-offs protect company from imitators
1. Inconsistencies with their image or reputation
1. Activities themselves - contrasting
2. Limits of internal coordination and control
 Interesting false trade-offs
o Simultaneous improvement of cost is possible when a company is far enough behind
o Once you get closer to that pff, those trade offs become very reall
 
STRATEGY IS MAKING TRADE OFFS IN COMPETING
 
Fit Drives Both Competitive Advantage and Sustainability
  Activities fit and reinforces one another
 Fit is the central component of advantage than most realize
 Types of Fit
1. Simple Consistency
i. Cumulate and don’t cancel each other out - single mindedness in the
corporation - clear communication
1. Activities are reinforcing
i. Ex. Neutrogena and luxury hotels
1. Optimization of effort
i. GAP - basic colour inventory held within three warehouses and not in store
 
 *Activity Systems*
 Hard to imitate interlocked activities (.9*.9*.9) gets smaller and smaller the probability
 Seeing strategy in terms of activity systems - reveal why organizational structure, systems and
processes need to be strategy-specific
 
STRATEGY IS CREATING FIT AMONG A COMPANY'S ACTIVITIES
 
Rediscovering Strategy
1. The Failure to Choose
1. Macho perspective too far from the front line to really now what the company's
weakness really is
2. The Growth Trap
1. Maytag although sales increase ROS continuously declined
3. Profitable Growth
1. Instead of developing new competencies how can you deepen your position - focused
strategy
4. Role of Leadership
 
 Strategy agenda demands discipline and continuity: its enemies are distraction and compromise
 
 The need to change must be driven by the ability to find new trade-offs and leverage a new
system of complementary activities into a sustainable advantage
 
The Five Competitive Forces That Shape Strategy

 All industries are linked = the same underlying drivers of profitability are the same
o INDUSTRY STRUCUTRE structure drives competition and profitability
o Understand forces -> the causes -> reveals the roots of profitability = FRAMEWORK
for anticipation and influencing competition
 
Forces that Shape Competition
 Strongest competitive force becomes the most important strategy formulation
 
1. Threat of Entry
a. Brings
i. New capacity -> pressure prices, cost, rate of investment (margins, growth)
1. Especially entrants that have capital (diversifying - eg. Apple into music)
b. To Prevent
i. Hold down prices, continually expand - IMPLICATIONS ON THEIR STRATEGY
c. Simply the threat can hold down profitability in a industry
d. 7 sources
i. Supply Side economies of scale
1. Spread fixed cost over more units, more efficient, command better term
with suppliers
2. All parts of the value of chain (including marketing)
ii. Demand Side benefits of scale
1. Buy willingness increases with the number of other buyers patronize the
product/service (social proof)
2. Reduces the price that new entrants can command until they have
strong enough customer base (which is why you would want to find a niche
market in most cases)
iii. Customer switching cost
1. Larger the cost the higher the barrier to entry - think integrating IT
systems (ERP systems)
iv. Capital Requirements
1. Fixe facilities, customer credit, inventories and fund start-up losses
2. NEVER OVERSTATE - if the industry is attractable enough - sustained
investors will provide entrants with the capital they need
a. Aircraft industry - the high resale value of planes
v. Incumbency advantages independent of size
1. Cost or quality advantages over potential rivals
2. (location, proprietary technology, access to better materials, brand
identity….)
vi. Unequal access to distribution channels
1. Too high create their own
2. Measure of loyalties to existing players (analyze their own power within
the chain)
vii. Restrictive government policy
1. Subsidies or Red Tape
 
 e. Keep in mind to really asses the strategy we must anticipate any means that potential
entrants will be able to circumvent the existing barriers
 
a. Expected Retaliation
b. The reaction from competition will influence whether to stay in or stay out
i. Resources to drive down your below cost of capital
ii. Capital intensive rather drive down the price to fill an excess capacity that may occur
because you are stealing their market share
iii. Fill distribution channels (flood)
2. The Power of Suppliers
a. Concentration of suppliers vs. buyers
b. Dependency on the industry (more will limit its power)
c. Switching cost (location, using a specialized equipment manufactured from them)
d. Differentiated product
e. Level of substitution
f. Threat of suppliers entering the industry (sheer power)
 
3. Power of Buyers
a. # of buyers - volume of purchases
b. Standard products - no differentiation
c. Switching cost
d. Integrate backwards
e. Price sensitive if
i. Size of its cost structure or budget
ii. Their own profits
iii. Importance of Quality
iv. Little effects on other aspects of the business (ROI)
f. Intermediate Buyers vs End Buyers
i. Consumer - needs are more intangible and harder to quantify
ii. Intermediate exude power when they can influence the purchasing decision of
consumers downstream
 
4. Threat of Substitutes
a. Sometimes indirect or downstream
i. Example: lawn mowers indirect substitute is when families move into multi-
family homes
ii. Even with in certain events for example Happy Father Day
b. Provides a ceiling on the profits
c. Level of relative value (price-performance
d. Switching Cost
e. Stay alert to changes in other industries - that could lead them to become attractive
substitutes
 
5. Rivalry among existing competitors
a. Intensity
i. # of competitors
ii. Industry growth
iii. Level of exit barriers
 iv. Commitment to the business
v. Cannot read other signals, diverse approaches to competing , or differing goals.
b. Basis - Price can cause customers to focus less on the product features and services
(Worse Basis)
i. Undifferentiated
ii. Fixed cost are high and marginal cost are low
iii. Capacity must be expanded
iv. Perishable - short life cycles
v. Other Types
1. Product features
2. Support services
3. Delivery time
4. Brand image
vi. QUESTION do they compete on the same dimensions?
 
Shaping industry Structure
 Redividing profitability
 Expand the overall profit pool
 
Typical Steps in Industry Analysis
Define the relevant Industry
 What products are in it? Which ones are part of another distinct industry?
 What is the geographic scope of competition?
 
Identify the participants and segment them into groups, if appropriate
Who are:
 The buyer and buyer groups
 The suppliers and supplier groups
 The competitors
 The substitutes
 The potential entrants
 
Asses the underlying forces drive each competitor force - which ones are weak or strong
 
Determine overall industry structure, and test the analysis for consistency
 Why is the level of profitability the way it is
 What are controlling forces for profitability
 Is the industry analysis consistent with actual long-run profitability
 Are more-profitable players better positioned in relation to the five forces
 
Analyze recent or future changes in each force
 
Identify aspects of the industry structure that might be influenced by competitors, by new entrants or
by your company
 
Customer Value Propositions in Business Markets
Three Kinds of Value Propositions
1. All benefits
a. Simplicity results in benefit assertion advocates features that add no value to customers
2. Favorable points of difference
a. "Often the question why should our firm purchase your offering instead of the
competition"
i. Value presumption - assuming that differences are favorable
3. Resonating focus
a. Business that full grasp the critical issues in a clients
b. Often times it has the structure of point of parity and favorable points of difference
 
Summary
Value All benefits Favourable points of Resonating focus
Proposition difference

Consist of All benefits All favourable points of The one or two points of difference
customers difference a market (and perhaps, a point of parity) whose
receive from offering has relative to improvement will deliver the greatest
market offering the next best alternative value to the customer for the
forseeable future

Answers the "Why should our "Why should our firm "What is most worthwhile for our firm
customer firm purchase purchase your offering to keep in mind about your offering"
question your offering" instead of the
competitor's"

Requires Knowledge of Knowledge of own Knowledge of how own market

market offering market offering and next offering delivers superior value to
best alternative customers compared with next best
alternative

Has the potential Benefit assertion Value presumption Requires customer value proposition
profit
 
Substantiate Customer Value Proposition
 Often lost use value word equations to visually show them how you will satisfy their needs
(VISUALLY POWERFUL)
 
Demonstrate Customer Value in Advance
 Due diligence really, understanding their operations before you submit your offering and
showing them immediate benefits
 
Document Customer Value
 Important to monitor the progress, not only for your reputation but for the company to truly
understand the value being created and how it can be passed on to the end customer
Creating Corporate Advantage

 When resources is a critical component of the success of a company

Comp Adv
d
Resources Business

Coordination Control
Organization

Resource Continuum

General Nature of Specialized
resources

Wide Scope of Narrow

business  Specialized
resources compete in a
narrower range of business

Transferring Coordination of Sharing

 more general the Mechanism
resource - effectively deploy it
through transfer

Financial Control Systems Operating

 Specialized value
moving from financial to
operating

Small Corporate Office Large

 The more general the Size
resource less sharing = smaller
office
 
 Relatedness about Resource Not Product
o Mercury Measures
 Core market growth flattened, therefore thought of mercury into the household
thermostat
 Had the resources to succeed in the industrial thermostat
 R&D, strict tolerance, made to order production, tech savy sales
force
 Household market
  R&D not as critical, not expertise in design, lacked the
capabilities for mass production
 Transferred vs Shared
o Public Good vs Private Goods
 Public - brand or best demonstrated practices that can be used in several
business
 Challenges - how to develop and preserve the good
 Private - common sales force or component in manufacturing basically a
resource that is much more difficult to manage and will lead to competition and
conflict
 More explicit coordination - same resource shared by multiple business
one unit can affect its us by another
 Financial vs Operating Control
o Financial control - managers accountable for a limited number of objective output
measures such as ROA or sales growth
 Mature stable industries - fewer variables
 Managers are accountable for the outcome - discrete business units
 Strong incentives to meet the nubers
o Operating control - recognizes events outside of the managers' influence such as
bankruptcy of a major customer, instead evaluate managers decisions and actions.
 Faster paced - managers must be very familiar with the firm's portfolio
 More coordination between corporate and business unit managers, mentors
and coaches
 More demands and thus a larger corporate structure
Finding Your Next Core Business
Issue: Misjudged the point of their core business had reached in its life cycle and whether it was time to
stay focused, expand or move on.
 
When is it Time for Deep Strategic Change:
1. Profit Pools - is it shrinking or is it shifting
a. Think Apple shift from PC to the music industry
2. Inherently inferior economics - new competitor enters the market without unburdened by
structures and costs
a. Think Kmart vs Walmart
3. Growth Formula Cannot be sustained
 
Evaluate Your Core Business
1. What is the state of our core customers
o Profitability
o Market share
o Retention Rate
o Measures of customer loyalty and advocacy
o Share of wallet
2. What is the state of our core differentiation
a. Definition and metrics of differentiation
b. Relative cost position
c. Business models of emerging competitors
d. Increasing or decreasing differentiation
3. What is the state of our industry's profit pools
a. Size growth and stability
b. Share of profit pools captured
c. Boundaries
d. Shifts and projections
e. High cost and prices
4. State of our core capabilities
a. Inventory of key capabilities
b. Relative importance
c. Gaps vis avis competitors and vis avis
d. Future core needs
5. What is the state of our culture and organization
a. Loyalty and undesired attrition
b. Capacity and stress points
c. Alignment and agreement with objectives
d. Energy and motivation
e. Bottlenecks to growth.
 
Example - Dometics - the refrigerator company that took a leadership position for RV vehicles
KSF's
1. Gradualism
2. Discovery of hidden asset
 3. Leadership economics - (rich get richer phenomena, where top 2 in an industry with more than
6 competitors own 75% of the market share)
4. Move from one repeatable formula that is unique to the company to another

 
Where Assets Hide
1. Undervalued business platform
a. Undeveloped adjacencies
b. Organizations that support the core
c. Noncore businesses
d. Orphan products
2. Untapped insight into customers
a. Unrecognized segments
b. Privileged access or trust
c. Underutilized data and information
3. Underexploited capability
a. Hidden corporate capabilities
b. Noncore capabilities in different divisions
c. Underleveraged core capabilities in different divisions
 
Tactic - Shrinking to Grow
 Vopak's - pave way for redefinition and given the resources to grow at a fast rate, compared to
actualy startups.
 
Seven Steps to a New Core Business
1. Define the core business - true state of the core
2. Core's full potential, durability of the differentiation
3. Develop a point of view about the future and define the status quo
4. Identify full range of options for redefining the core both inside and out
5. Identify hidden assets - create new option or enable others
6. Use key criteria (profit pool, leadership, repeatability, chances) to decide which assets to employ
in redefining your core
7. Set up a program office to help initiate, track and manage course correction