PAPER 301 BUSINESS POLICY AND STRATEGIC ANALYSIS

* CHALLENGING
* SHALL REQUIRE HARD WORK
* ENJOYABLE
* ACTIVE LEARNING: LEARNING BY DOING
* ACTIVE LISTENING
* INDIVIDUAL INITIATIVE + TEAM-WORKING

* PUNCTUALITY
 WHAT IS STRATEGY?

CHARACTERISTICS OF STRATEGIC DECISION MAKING:

*LONG TERM
*PLANNING
*CHIEF GOALS
*CHIEF MEANS
*ACTIVE RATHER THAN PASSIVE DECISION MAKING
*INTEGRATIVE RATHER THAN PIECE-MEAL
*CONSISTENCY
*CLARITY
ALL OF ABOVE MAY BE LIMITED BY:

*UNCERTAINTY

*COMPLEXITY

*BOUNDED RATIONALITY

HENCE, NEED FOR:

*FLEXIBILITY

* INTUITION, EXPERIENCE, RULES OF THUMB,

TRIAL & ERROR TO SUPPLEMENT RATIONAL
ANALYSIS WHEN FORMULATING STRATEGY
DEFINITIONS OF STRATEGY:

ORIGIN OF THE TERM:

“STRATEGY” DERIVED FROM GREEK “STRATEGIA”
STRATOS (ARMY) + AG (TO LEAD)

ENGLISH DICTIONARY DEFINITIONS:

THE ART OF WAR, ESPECIALLY THE PLANNING OF
MOVEMENTS OF TROOPS AND SHIPS ETC. INTO
FAVOURABLE POSITIONS; PLAN OF ACTION OR POLICY IN
BUSINESS OR POLITICS ETC.
- OXFORD POCKET DICTIONARY
 COMMON ELEMENTS IN SUCCESSFUL STRATEGIES

SUCCESSFUL
STRATEGY

EFFECTIVE IMPLEMENTATION

LONG-TERM, UNDERSTANDING OBJECTIVE

SIMPLE, OF APPRAISAL
AGREED COMPETITIVE OF
OBJECTIVES ENVIRONMENT RESOURCES
 What is your life’s strategy?

Do you have a strategy?

Should you have a strategy?
What are your chief goals in life?
Broadly, how do you intend to achieve these?

Multiplicity of goals
Multiplicity of means
So what are the trade-offs?
The need to make strategic choices
BUSINESS / ORGANIZATIONAL STRATEGY

What is an organization?

An organization is a group of people who

enter into contractual relationships with
each other with the objective of collectively
creating economic value

What is economic value?

What are contracts?

What are relationships?
Contracts can be:
Complete contracts
Incomplete contracts

Examples of complete contracts:

Markets for certain consumer products

Examples of incomplete contracts:

Marriage
Family
Organisations / Firms
When should parties prefer entering into incomplete
contracts over entering into complete contracts?

- Whenever it is more efficient / less costly to do so

All contractual arrangements incur costs

- Costs of writing contracts
- Costs of monitoring contracts
- Costs of enforcing contracts

TRANSACTION COST ECONOMICS

(Economics of Strategy: Besanko et. all)
An organization is a group of people who
enter into contractual relationships /
incomplete contracts with each other with the
objective of collectively creating economic
value

However, some of the contracts within organisations

may be of a more complete nature
What are the goals of an organisation?

The collective creation of economic value

So are the interests of all organisational members congruent?

How do you distribute the economic value created between

the organisational members?

Conflict of interest over the issue of distribution

Can the conflict over the slicing of the cake affect the size of
the cake?
A key task of management is to balance the interests of the
various stakeholders of the firm

A key task of management is to reconcile the

competition – cooperation dilemma
 Suppliers
Local
Communities Governments

Shareholders
Firm Employees

Creditors Customers
So what are the goals that a firm pursues?

Depends upon:
: the preferences of stakeholders
: the relative power of the stakeholders

Preferences may be influenced by:

Values
which in turn may be influenced by:
•Organisational culture
•Societal culture
What determines relative stakeholder power?

Demand and supply conditions

Ease of substitution
Relative wealth
Degree of organisation
Legal system
Cultural norms, historical norms, conventions
Degree of information asymmetry
Who has access to information
The analysis above implies that organisations might pursue
sub-optimal goals
i.e. not maximise total economic value

Example: Pursuit of managerial interest

Baumol: Prestige associated with high market share

Marris: Power, Personal reward
Williamson: Status, Empire building, Salary, Perks
Galbraith: Growth, Independence, Challenge
Aligning managerial and shareholder interest

Jenson & Meckling: Principal – Agency Problem

-Alignment of interest: profit sharing, stock options

- Monitoring
- Provision of audited information
- Threat of sanctions: short-term contracts
- Market for corporate control

- Use of trust: Stakeholders as collaborators

How do you create trust?

-Role of Values:
Societal culture
Organisational culture
Leadership

- Create incentive structures that promote repeated transactions

with the same parties over the long term

- Create a ‘fair’ organisation

- Enabling legislation
Suppose a firm pursues the goal of maximising economic value
added – when is this synonymous with pursuing the goal of
maximising profit?

- Only when there are no imperfections in the factor markets

In Anglo-Saxon capitalist model: maximisation of shareholder

returns / profits / wealth

Over what period should profit / returns be maximised?

Short run profit maximisation may not be compatible with long
run profit maximisation
Short run profits may need to be sacrificed in order to
achieve:

Market share
Investments
Risk taking
Learning
Building customer loyalty
: all of which may help in long run profit
maximisation but depress short term
profits
BUT WHAT IS LONG TERM?
AND HOW DOES ONE KNOW THAT LONG RUN PROFIT
MAXIMISATION IS BEING ACHIEVED?
Should we rely on the share price as a measure of a firm’s net
worth?

Problems:
- Price based on marginal share trading
- Information asymmetry
- Credible signalling
- Market may be myopic
- Investor psychology, fads, fashions (e.g. Internet Boom)
Alternatives?

Balanced scorecard approach?

Strategy: Chief long-term goals and means

How does a firm achieve optimum long-term profits?

What are the key strategic choices it needs to make?

 STRATEGIC CHOICES
with respect to:

Nature, Domain and Scope of Activities

Evaluating the Success of Activities

Developing, Acquiring, Allocating Resources and Capabilities

Creating an effective match with the challenges of the

environment

Managing the Relationships between Stakeholders in the Firm

 STRATEGIC SUCCESS AND STRATEGIC FIT

Corporate success is based upon an effective match between the

external relationships of a firm and its own distinctive capabilities
- John Kay
(in Foundations of Corporate
Success, 1993)
 STRATEGY AND STRETCH

1. Creating a chasm between an organisation’s resources and

capabilities, and its ambitions
2. Bridging the chasm through leveraging resources and
capabilities

- Hamel and Prahalad, Strategy as Stretch and Leverage,

HBR, 1993
 AN OVERVIEW OF THE STRATEGY PROCESS

Environmental Resource and

Analysis capability analysis
Strategic
Analysis

Identifying
Options Strategic Strategic
Choice Implementation Culture
Stakeholder
Expectations
Selecting a
Organisation Systems
Strategy
Structure
(Johnson & Scholes)
 Levels of Strategy

Corporate Strategy
Business Strategy
Operational Strategy
 MISSION AND VISION

-Content
- Purpose
- Strategic Rhetoric?
- Examples
ANALYSING THE ENVIRONMENT
- Customers
- Competitors

- MACRO ENVIRONMENT
- INDUSTRY ENVIRONMENT
 MACRO ENVIRONMENT

SOCIAL FACTORS TECHNOLOGICAL

FACTORS

ECONOMIC POLITICAL FACTORS

FACTORS
 INDUSTRY ENVIRONMENT

INDUSTRY STRUCTURE:

- PERFECT COMPETITION
- MONOPOLY
- MONOPOLISTIC COMPETITION
- OLIGOPOLY
PORTER”S FIVE FORCES OF COMPETITION FRAMEWORK

BARGAINING
POWER OF
SUPPLIERS

FIRM RIVALRY THREAT

THREAT WITHIN
OF OF
INDUSTRY SUBSTITUTES
ENTRY

BARGAINING
POWER OF
BUYERS
 I. THREAT OF SUBSTITUTES

- BUYER PROPENSITY TO SUBSTITUTE

- EXISTENCE, RELATIVE PRICES AND PERFORMANCE OF

SUBSTITUTES

PRICE ELASTICITY OF DEMAND

CROSS-PRICE ELASTICITY OF DEMAND
 II. THREAT OF ENTRY

ENTRY REDUCES SUPER-NORMAL PROFITS

ACTUAL ENTRY OR MERE THREAT OF ENTRY CAN REDUCE
PROFITS ?
- CONTESTABLE MARKETS: NO BARRIERS TO ENTRY OR
EXIT
- ROLE OF INDUSTRY-SPECIFIC SUNK COSTS

MOST INDUSTRIES: NEW ENTRANTS CANNOT ENTER ON EQUAL

TERMS AS ESTABLISHED FIRMS

WHY?
WHAT ARE THE VARIOUS KINDS OF ENTRY BARRIERS?
 1. CAPITAL REQUIREMENTS

-CAN DISCOURAGE ALL BUT THE LARGEST COMPANIES

e.g. BOEING-AIRBUS DUOPOLY

 2. ECONOMIES OF SCALE

-IN INDUSTRIES THAT ARE CAPITAL / RESEARCH /

ADVERTISING INTENSIVE

- NEW ENTRANTS STRATEGY:

SHOULD IT ENTER ON SMALL SCALE?
SHOULD IT ENTER ON A LARGE SCALE?

AUTOMOBILES: SALES OF FOUR MILLION VEHICLES A

YEAR NECESSARY TO BE A LOW-COST PRODUCER

AIRBUS A 380 SUPERJUMBO: $ 16 BILLION

 3. QUALITY UNCERTAINTY

SEARCH GOODS

EXPERIENCE GOODS

CREDENCE GOODS

HENCE ESTABLISHED BRANDS HAVE ADVANTAGE OVER

NEW ENTRANTS

ROLE OF ADVERTISING / MARKETING EXPENDITURE AS A

CREDIBLE SIGNAL OF QUALITY: HOW?
 4. PRODUCT DIFFERENTIATION

DIFFERENTIATION MAY BE BASED UPON:

PRODUCT FEATURES
PACKAGING
IMAGE
SUPPLEMENTARY SERVICES

- ROLE OF MARKETING IN CREATING DIFFERENTIATION

- DIFFERENTIATION CREATES BRAND LOYALTY AND
HENCE MAY LEAD TO HIGHER PROFITS

Percentage of US consumers loyal to a single brand:

Toothpaste: 61% Mayonnaise: 65% Batteries: 30%
 5. ABSOLUTE COST ADVANTAGES

-ACQUISITION OF LOW-COST SOURCES OF RAW MATERIALS

- ECONOMIES OF LEARNING (ENTERED EARLIER): LEARNING

CURVE

- FIRST MOVER ADVANTAGES VERSUS SECOND-MOVER

ADVANTAGES
 6. ACCESS TO CHANNELS OF DISTRIBUTION

-ESPECIALLY IMPORTANT WHEN RETAILING INDUSTRY HAS

HIGH CONCENTRATION: BATTLE FOR SUPERMARKET SHELF
SPACE
- RETAILERS MAY BE RISK AVERSE
- CAPACITY OF DISTRIBUTION CHANNELS
 7. GOVERNMENTAL AND LEGAL BARRIERS

- PATENTS

- COPYRIGHTS

- LICENSING
 8. EXPECTED RETALIATION FROM INCUMBENTS

FORMS OF RETALIATION:

-AGGRESSIVE PRICE CUTTING (PREDATORY PRICING)

- INCREASED ADVERTISING
- SALES PROMOTIONS
 9. NON-ACCESS TO CRITICAL RESOURCES AND
CAPABILITIES

WHAT ARE RESOURCES AND CAPABILITIES?

HOW DO FIRMS ACQUIRE / DEVELOP THESE?
 ARE ENTRY BARRIERS EFFECTIVE?

DEPENDS UPON:
- STRENGTH OF BARRIERS
- RESOURCES POSSESSED BY THE ENTRY SEEKERS
- STRATEGIES PURSUED BY ENTRANTS: INNOVATION?
 III. FIRM RIVALRY WITHIN INDUSTRY
(RIVALRY BETWEEN ESTABLISHED COMPETITORS)

DEPENDS UPON:

1. CONCENTRATION:
CR4 (FOUR FIRM CONCENTRATION RATIO)

HIGHER THE CONCENTRATION, THE GREATER THE

CHANCES FOR COLLUSION

COORDINATION TOUGHER WHEN LARGE NUMBER OF FIRMS

2. DIVERSITY OF COMPETITORS

-SIMILARITIES IN ORIGIN, OBJECTIVES, COSTS, STRATEGIES,

MANAGEMENT STYLES

3. PRODUCT DIFFERENTIATION
- PERFECT COMPETITION VERSUS OLIGOPOLIES
4. EXCESS CAPACITY AND EXIT BARRIERS /
COST CONDITIONS: SCALE ECONOMIES AND RATIO OF FIXED TO
VARIABLE COSTS

IF PRICES ONLY COVER AVERAGE VARIABLE COSTS THEN

LOSSES WILL BE MADE

WHY IS EXCESS CAPACITY CREATED? WHY DOES OVER-

INVESTMENT OCCUR?

IF ABOVE HAPPENS, WHAT IS THE SOLUTION?

PETROCHEMICALS, TYRES, STEEL, MEMORY CHIPS, AIRLINES

 IV. BARGAINING POWER OF BUYERS

-BUYER’S PRICE SENSITIVITY

- SIZE AND CONCENTRATION OF BUYERS RELATIVE TO

SUPPLIERS

- BUYERS’ INFORMATION

-VERTICAL INTEGRATION POSSIBILITIES

 V. BARGAINING POWER OF SUPPLIERS

EXAMPLES:
INTEL IN CHIPS
MICROSOFT IN O.S.
SHARP IN FLAT SCREENS
SEAGATE IN DISK DRIVES
HAVE REDUCED PROFITABILITY OF P.C.
MANUFACTURERS
 APPLYING INDUSTRY ANALYSIS

1. FORECASTING INDUSTRY PROFITABILITY:

- WHAT WILL INDUSTRY LOOK LIKE IN FIVE YEARS TIME?

- HOW ARE THE STRUCTURAL FORCES GOING TO

AFFECT THE INDUSTRY OVER A PERIOD OF TIME?
2. STRATEGIES TO ALTER INDUSTRY STRUCTURE
 DEFINING INDUSTRIES: WHAT’S THE RELEVANT MARKET?

- SUBSTITUBALITY ON THE DEMAND SIDE

- SUBSTITUTABILITY ON THE SUPPLY SIDE

- SEGMENTATION
 LIMITATIONS OF PORTER’S FIVE FORCES FRAMEWORK

-ROLE OF COMPLEMENTS

- DYNAMIC COMPETITION: THE PROCESS OF CREATIVE

DESTRUCTION

- ROLE OF FIRM VERSUS ROLE OF INDUSTRY:

FIRM-SPECIFIC RESOURCES AND CAPABILITIES

VERSUS
ROLE OF POSITIONING IN INDUSTRY
 ADDITIONAL ISSUES TO CONSIDER WHEN ANALYSING
ENVIRONMENT

- COMPETITOR ANALYSIS

- WHAT DO CUSTOMERS WANT?

MARKET SEGMENTATION

- STRATEGIC GROUPS AND STRATEGIC SPACE