SESSION 4: STRATEGIC

MANAGEMENT
York University - ADMS 1000
Jason Yarmolinsky
Learning Goals

 The ability to respond effectively to the business environment is the

fundamental challenge of strategic management. The aim of this session is to
identify the forces that shape industry structure and consider how they
influence business and corporate level strategies.
Questions to Keep in Mind…

 1. What is strategic management?

 2. Can you identify the central components of industry structure?
 3. What is the role of organizational resources and capabilities in firm
performance?
 4. How would you describe the three generic business strategies?
 5. What is corporate strategy?
WHAT IS STRATEGIC MANAGEMENT?

 Strategic management consists of analysis, decisions, implementations, and

evaluations a firm undertakes in order to create and sustain its competitive
advantages
 The ongoing process of strategic management is critical to firm performance
and survival in that an effective process of strategic management can allow a
firm to sustain its competitive advantage, which in turns enhances its
performance and survival chance.
 Strategy is defined as the plans made or the actions taken, in an effort to
help an organization/firm obtain its intended purposes
 To be successful and effective, organizations must adapt their strategies to their
internal and external environments
Analyzing the External Environment -
Michael Porter’s 5 Forces Model

• These forces can either independently or jointly affect the attractiveness of the industry
5 Forces Model – Threat of New Entrants

 Entrants bring new competition, desire to gain market share, and substantial
resources and capabilities.
 Incumbents need to consider how to create entry barriers to deter potential
new entrants:
 Economies of Scale - spreading the costs of production over the number of units
produced
 Capital Requirements - the threat of new entrants is reduced as the level of
required capital increases.
 Switching Costs - the costs (monetary or psychological) associated with changing
from one supplier to another from the buyer perspective.
 Access to distribution channels
 Cost disadvantages independent of scale (i.e Government contracts/regulation)
5 Forces Model – Bargaining Power of
Suppliers
 Suppliers can exert bargaining power over incumbents in an industry by
demanding better prices or threatening to reduce quality of purchased goods
or services
 Their Power depends on:
 the criticality of resources the suppliers hold to the incumbents (the more critical,
the more power suppliers hold)
 the number of suppliers available relative to the number of incumbents in an
industry. (The less suppliers, the more power individual suppliers hold)
5 Forces Model - Bargaining Power of Buyers

 Buyers can affect industry performance by demanding lower prices, better

quality or services, or playing incumbents against one another.
 Their power depends on:
 Switching Costs: the costs (monetary or psychological) associated with changing
from one supplier to another from the buyer perspective.
 Undifferentiated Products: Undifferentiated products allow buyers to find
alternatives from other incumbents.
 Importance of incumbents’ products to buyers
 The number of incumbents relative to the number of buyers
5 Forces Model – Threat of Substitutes

 All firms in an industry often compete with other firms in different industries,
where the firms provide substitute products or services with similar purposes.
 Remember– the substitute products/services don’t have to be identical– they just
have to solve the same problem
 Consider the impact of technology and consumer preferences
 AirBnB and Hotels
 Uber and Taxis
 Online Stores versus Physical Retail Stores
5 Forces Model – Rivalry Among Existing
Firms
 Lack of differentiation or switching costs
 Numerous or equally balanced competitors
 High exit barriers
Limitations of the 5 Forces Model

 The model does not explicitly take roles of technological change and
governmental regulations into consideration. Specifically, it does not address
how technological change and governmental regulations affect the power
relationships between forces.
 The focus of this model is primarily on the power relationships between each
force at a given point of time. As such, it may have limited implications for
future strategic decision-making.
 The model assumes that all incumbents experience the same power
relationship with each force. However, incumbents differ in terms of their
resources and firm size, which can give them more or less power in
influencing their suppliers or customers.
Analyzing the Internal Environment

 A firm’s resources and capabilities include all of the financial, physical,

human, and organizational assets used by a firm to develop, manufacture,
and deliver products or services to its customers
 Financial resources include debt, equity and retained earnings
 Physical resources include the machines, production facilities and plants,
and buildings firms use in their operations.
 Human resources include all the experience, knowledge, judgment, risk-
taking propensity, and wisdom of individuals associated with a firm.
 Organizational resources are the history, relationships, trust, and
organizational culture that attributes of groups of individuals associated with
a firm, along with a firm’s formal reporting structure, management control
systems, and compensation policies.
VRIO model

 suggests that managers need to look inside of their firms for competitive
advantage. In order for a firm to achieve high performance, managers need to
look at the resources and capabilities of their firm and ask four important
questions:
 1. The question of value (V)
 2. The question of rareness (R)
 3. The question of imitability (I)
 4. The question of organization (O)
VRIO model - The question of value (V)

 Do the firms’ resources and capabilities add any value to capture market
share or to enhance profitability, either through exploiting emerging
opportunities or by neutralizing threats.
 Some firms do have such resources and capabilities.
 Consider products, brand etc.
VRIO model - The question of rareness
(R)
 Assess if an organization’s valuable resources and capabilities are unique
among its competitors
 Consider: technology, patents, unique elements
VRIO model - The question of imitability
(I)
 Valuable and rare resources and capabilities can provide firms with
competitive advantage; however, how long the advantage lasts depends upon
how quickly imitation could occur
 Patents expire. First mover’s advantages only last as long as it takes someone to
follow…
VRIO model - The question of
Organization (O)
 Can the firm be organized in effective and efficient ways to exploit their
valuable, rare, and difficult to imitate resources and capabilities to maximize
their potentials.
 Having the other elements without the ability to structure the organization
effectively will lead to downfall
 Consider companies with good products/services that have failed.
VRIO Model in Practise

Question of Question of Question of Question of Competitive

value rareness imitability Organization advantage

A particular set of In favor of the In favor of the In favor of the In favor of the firm Sustainable
resources and firm firm firm competitive
capabilities advantage

A particular set of In favor of the In favor of the Not in favor of In favor of the firm Temporal
resources and firm firm the firm competitive
capabilities advantage

A particular set of In favor of the Not in favor of In favor of the In favor of the Temporal
resources and firm the firm firm firm competitive
capabilities advantage

If any of the answers to these questions are not in favour of the firms, then the firms would
only have temporal advantage over their competitors.
SWOT Analysis

 Strengths, Weaknesses, Opportunities and Threats

 Strengths and Weaknesses are Internal to the firm (VRIO analysis)
 Opportunities and Threats are External to the firm (Porter 5 Forces, general
environmental analysis)
 Firms that strategically use their internal strengths in exploiting
environmental opportunities and neutralizing environmental threats while
avoiding internal weaknesses are more likely to increase market share, sales,
or profitability than other firms.
Levels of Strategy in an Organization

Business Level
Each business unit in a diversified firm chooses a business-level strategy
as its means of competing in individual product markets.

Corporate Level
Specifies actions taken by the firm to gain a competitive advantage by selecting and
managing a group of different businesses competing in several industries and product
markets.
Business Level Strategy

Generic Strategies

Cost Leadership Differentiation Focus

Superior profits through lower Creating a product or service that is

cost. perceived as being unique
“throughout the industry”.
Example: Walmart Concentrating on a limited part
Example: Apple of the market.
Example: South African Snack
Store – Thornhill, Ontario
Cost Leadership

 Cost leadership is to gain competitive advantages by reducing economic cost

below all of competitors
 Sources of leadership:
 Economies of scale
 Learning Curve Economies (Knowledge obtained to achieve more with less, or quicker)
 Low-cost access to factors of productions (inputs, resources, labour etc.)
 Advantages of this strategy:
 1. Being a cost leader gives a firm the highest profit margins in the industry, which
allow the firm to obtain abnormal returns (at least for the short term).
 2. It gives firms flexibility in response to pressures coming from five forces in the
industry environment.
 3. The threat of new entrants would be lower for the firm, compared to other incumbent
firms
Product Differentiation

 Firms attempt to gain competitive advantages by increasing the perceived value of

their products or services relative to that of other firms’ products or services.
 There are many ways to create value of products or services to allow firms to
differentiate themselves from other firms, including product features, linkages
between functions, location, product mix, links with other firms, and service.
 Customer perception is paramount– if customers accept or value the differentiation,
then it provides an advantage
 Firms that obtain competitive advantages by pursuing product differentiation,
they are often in good positions to defend the pressures from five forces.
 The threats of new entrants and substitutes for the firms would be lower than that for
others since the firms have imposed switching costs for their customers
 Managers need to ensure that the advantage is sustainable or the differentiation
premium will be lost
Focus Strategies
 While cost leadership and product differentiation are oriented to broad
markets, focus strategy is to target on a particular buyer group, segment of
the product line, or geographic market.
 The focus strategy rests on the premise that a firm is able to compete
efficiently or effectively by targeting on a particular narrow market
Corporate-Level Strategy
 Corporate-level strategy addresses two related challenges:
 What businesses or markets should a firm compete in.
 How these businesses or markets can be managed so they create synergy.
 Successfully managing diversification can give a firm enormous profitability
and competitive advantage
 Diversifying to new markets provide organizations with opportunities to
sustain growth and increase revenue.
 By diversifying into new markets, firms have opportunities to share related
activities, which in turn achieve economies of scope and then increase
profitability and revenue
 firms can also leverage their core resources and capabilities to explore growth
opportunities in new markets.
 Diversification Strategies
 Related diversification refers to the situation where a firm expands its core
businesses or markets into related businesses or markets. Such an expansion
usually involves horizontal integration across different business or market
domains. It enables a firm to benefit from economies of scope and enjoy greater
revenues
 I.E uberEATS, ROM Friday Night Live
 Unrelated Diversification: where a firm diversifies into a new market that is not
similar to its current market domains.
 This kind of unrelated diversification tends to provide little synergies for a firm
given that there are few opportunities for sharing activities or leveraging
resources and capabilities.
 A firm pursuing unrelated diversification tends to have (or believe) the synergies
created (or be created) through corporate office’s management skills
 I.E Berkshire Hathaway, ONEX
Diversification Strategies - Continued

 Vertical Integration: an extension or expansion of firm’s value chain activities

by integrating preceding or successive productive processes
 Backwards Integration: the firm incorporates more processes toward the source of
raw materials (Pizza company buying a cheese company)
 Forward integration: the firm incorporates more processes towards the source of
the ultimate customer (i.e Brookfield Properties buying Forever 21)
 Provides firms with benefits including securing raw materials or distribution
channels, protection of and control over valuable assets, and reduction of
dependence on suppliers or distributors
Means to Diversify – Internal
Development
 Internal Development – Through utilizing a firm’s own internal processes (i.e
research and development, product development etc.)
 Ex. Microsoft’s X-Box was internally developed to enter the video game industry
 Benefits:
 Organization has full control
 Revenue/profit does not have to be shared
 Disadvantages:
 Costly
 Risky
Means to Diversify – Mergers and
Acquisitions
 Mergers refer to two firms merge together to create a new firm with a new identity.
 TD Bank and Canada Trust became TD Canada Trust
 Acquisitions refer to a firm acquire the majority of shares of the other firm.
 In some cases, the acquired firms will become a division of the acquiring firm. In other case,
the acquired firms still operate independently or remain their brand or firm identity
 Teavana was acquired by Starbucks
 Benefits
 provide firms with quick access to new resources and capabilities to compete in the new
markets
 Disadvantages
 Risky
 Difficulties combining two organizations under one shared culture
Means to Diversify – Strategic Alliance

 Strategic alliances refer to two or more than two firms or organizations working together to
achieve certain common goals.
 Major forms
 Non-equity alliances (Longos and Starbucks)
 Equity alliances (Microsoft and Facebook)
 Joint Ventures (Libra cryptocurrency– Facebook and financial institutions)
 strategic alliances provide firms with quick access to new resources and capabilities
contributed by alliance partners.
 strategic alliances can be less costly and less resource commitment.
 Firms also share risk associated with diversification with alliance partners.
 On the other hand, firms will have to share potential revenue or profits with alliance
partners.
 There are some specific risks associated with strategic alliances, the partner selection in
particular
Case – A & W

 Question 1 What business-level strategy would you recommend and why?

Explain with examples.
Case – A & W - Question 1
 Consider Case Facts
 A&W became the first national burger chain to offer California-based Beyond Meat’s burger on its
menu.
 A&W is trying to stand out and be the leader in plant-based, fast-food burgers.
 A&W’s strategy is to attract the vegan, the vegetarian, and the healthy consumer back to the fast-food
chain.
 Instead of calling the patties a “veggie” burger, the chain has called it a “plant-based” burger to
appeal to everyone who may want a healthier option. This labelling is also more inclusive to the
overall population.
 the company now offers beef raised without any added hormones or steroids as well as chicken raised
without antibiotics. This is something McDonalds, Burger King, Wendy’s and other burger chains do not
do.
 While competitors like McDonalds and Burger King stick to their traditional approach, A&W is leading
change and bringing in a younger, urban clientele for healthier choices.
 millennials were 13% more willing than other consumers to pay a premium for products from an
environmentally friendly company and 12% more likely to buy a product that was fresh, natural, or
organic
 Answer: Differentiation
Case – A & W - Question 2

 Conduct a VRIO analysis of the company.

 1. The question of value (V)
 Canadian brand, located across Canada  economies of scale and reach
 2. The question of rareness (R)
 A and W is unique amongst its main competition in terms of quality of ingredients and focus on
plant based foods
 3. The question of imitability (I)
 If A and W has success, then other firms could imitate them
 4. The question of organization (O)
 Organization is seasoned, “The A&W Revenue Royalties Income Fund, which invests the
securities of A&W Food Services, is up 7.3 per cent this year and hit a 15-month high in
August.” but is not especially stronger than its competition

 Overall: Temporary Competitive Advantage

Case – A & W - Question 3

 Conduct an industry analysis of Michael Porter’s Five Forces Model.

Case – A & W - Question 3

 Threat of New Entrants – Medium/High

 The industry is quite saturated from a cross-country fast-food restaurant perspective
 There are smaller, differentiated plant-based/vegetarian restaurants following a differentiation strategy that
continue to pop up.
 Switching Costs are Low
 Bargaining Power of Suppliers - High
 There are limited plant-based burger suppliers (as it’s a new, developing market)
 Of those that exist, not all can guarantee the quality levels required, at the quantity A and W wishes to sell at.
 Bargaining Power of Buyers- High
 No switching costs, plenty of alternatives
 Threat of Substitutes – Medium/High
 While A and W offers some unique offerings, other restaurants will likely imitate this in the future
 Rivalry amongst Firms – High
 High levels of competition amongst firms