STRATEGIC MANAGEMENT COURSE

Master in Management Program

THE STRATEGIC POSITION

UNIT 2

Professor Maria Nikishina

Term II Year 2020
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INTENDED VERSUS REALIZED STRATEGY

The business environment is far from predictable.

 Intended strategy
Organizational decisions are determined only by analysis.
Intended strategies rarely survive in the original form.
VERSUS
 Realized strategy
Decisions are determined by both analysis (deliberate) and unforeseen
environmental developments, unanticipated resource constraints,
and/or changes in managerial preferences (emergent).
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INTENDED VS REALIZED STRATEGY

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LAYERS OF BUSINESS ENVIRONMENT

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LAYERS OF BUSINESS ENVIRONMENT

Environment is what gives organizations their means of survival (in private

sector, satisfied customers are what keep an organization in business; in
public sector, it is government, clients, patients or students that typically
play the same role).

Environment is also the source of threats (hostile shifts in market demand,

new regulatory requirements, revolutionary technologies or entry of new
competitors).
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LAYERS OF BUSINESS ENVIRONMENT

 Macro-environment is the highest-level layer: consists of broad
environmental factors that impact almost all organizations.
 PESTEL framework can be used to identify how future trends in the
political, economic, social, technological, environmental (‘green’) and
legal environments might impinge on organizations.

PESTEL analysis provides the broad ‘data’ from which to identify key
drivers of change.
These key drivers can be used to construct scenarios of possible futures.
Scenarios consider how strategies might need to change depending on
the different ways in which the business environment might change.
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LAYERS OF BUSINESS ENVIRONMENT

Industry/sector - next layer with this broad general environment.
It is made up of organizations producing the same products or services (five
forces framework).

Competitors and markets - the most immediate layer surrounding organizations.

Within most industries or sectors there will be many different organizations with
different characteristics and competing on different bases, some closer to a
particular organization, some more remote.
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MACRO-ENVIRONMENT: PESTEL ANALYSIS

Provides a comprehensive list of influences on the possible success or failure of
particular strategies.
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PESTEL ANALYSIS FOR AIRLINE INDUSTRY

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KEY DRIVERS FOR CHANGE

• Environmental factors likely to have a high impact on the success or failure of
strategy.

Birth rate is a key driver for those planning nursery education provision in the
public sector.

• Typically key drivers vary by industry or sector.

Clothing retailer may be primarily concerned with social changes driving

customer tastes and behavior, for example forces encouraging out-of-town
shopping.

Computer manufacturer is likely to be concerned with technological change,

for example increases in microprocessor speeds.
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PORTER’S FIVE FORCES FRAMEWORK

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THE THREAT OF ENTRY & BARRIERS TO ENTRY

• Threat of entry is low when barriers to entry are high and vice versa.

• The main barriers to entry are:

 Economies of scale/high fixed costs
 Experience and learning
 Access to supply and distribution channels
 Differentiation and market penetration costs
 Government restrictions (e.g. licensing)

• Entrants must also consider the expected retaliation from organisations

already in the market
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THE THREAT OF SUBSTITUTE

Substitutes are products or services that offer a similar benefit to an
industry’s products or services, but by a different process.

Customers will switch to alternatives (and thus the threat increases) if:

• The price/performance ratio of the substitute is superior (aluminium maybe

more expensive than steel but it is more cost efficient for some car parts).

• The substitute benefits from an innovation that improves customer

satisfaction (high speed trains can be quicker than airlines from city centre to
city centre)
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THE POWER OF SUPPLIERS

Powerful suppliers can eat organisation’s profits simply by raising their prices.

Supplier power is likely to be high when:

 The suppliers are concentrated (few of them).
 Suppliers provide a specialist or rare input.
 Switching costs are high (it is disruptive or expensive to change suppliers).
 Suppliers can integrate forwards (e.g. low cost airlines have cut out the use
of travel agents).
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THE POWER OF BUYER

Buyers are the organisation’s immediate customers, not necessarily the
ultimate consumers.
If buyers are powerful, then they can demand cheap prices or product /
service improvements to reduce profits .

Buyer power is likely to be high when:

 Buyers are concentrated
 Buyers have low switching costs
 Buyers can supply their own inputs (backward vertical integration)
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COMPETITIVE RIVALRY
Competitive rivals are organisations with similar products and services
aimed at the same customer group and are direct competitors in the
same industry/market (they are distinct from substitutes).

The degree of rivalry is increased when:

 Competitors are of roughly equal size
 Competitors are aggressive in seeking leadership
 The market is mature or declining
 There are high fixed costs
 The exit barriers are high
 There is a low level of differentiation
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ISSUES IN FIVE FORCES ANALYSIS

• Apply at the most appropriate level – not necessarily the whole
industry (European low cost airline industry rather than airlines
globally).

• Note the convergence of industries – particularly in the high tech

sectors (digital industries - mobile phones/cameras/mp3 players).

• Note the importance of complementary products and services

(Microsoft windows and McAfee computer security systems are
complements). This can almost be considered as a sixth force.
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COMPARATIVE INDUSTRY STRUCTURE ANALYSIS

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TYPES OF INDUSTRY
• Monopolistic industries - an industry with one firm and therefore no
competitive rivalry. A firm has ‘monopoly power’ if it has a dominant
position in the market (BT in the UK fixed line telephone market).

• Oligopolistic industries - an industry dominated by a few firms with

limited rivalry and in which firms have power over buyers and suppliers
(FEDEX/UPS, COCA-COLA/PEPSICO).

• Perfectly competitive industries - where barriers to entry are low, there

are many equal rivals each with very similar products, and information
about competitors is freely available. Few (if any) markets are ‘perfect’
but may have features of highly competitive markets (mini-cabs in
London).
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TYPES OF INDUSTRY
• Hypercompetitive industries - where the frequency, boldness and
aggression of competitor interactions accelerate to create a condition of
constant disequilibrium and change.

• Hypercompetition often breaks out in otherwise oligopolistic industries

(mobile phones).

• Organisations interact in a series of competitive moves in

hypercompetition which often becomes extremely rapid and aggressive as
firms vie for market leadership.
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MAIN COMPETITIVE INDUSTRY STRUCTURE

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INDUSTRY GROWTH
 Affects intensity of rivalry among competitors
 During periods of high growth:
Consumer demand rises + Price competition among firms decreases
 During periods of negative growth:
Rivalry is fierce
Rivals can only gain at the expense of one another

Example:
Demand for traditional fast food providers - McDonald’s, Burger King, and Wendy’s
has been declining in recent years. Consumers have become more health-conscious
and demand has shifted to alternative restaurants - Subway, Chick-fil-A, and Chipotle.
Attempts by McDonald’s, Burger King, and Wendy’s to steal customers from one
another include frequent discounting tactics like dollar menus. Such competitive tactics
are indicative of cut-throat competition and a low profit potential in the traditional
hamburger fast food industry.
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STRATEGIC GROUPS
Strategic groups are organisations within an industry/sector with similar strategic
characteristics, following similar strategies or competing on similar bases.

These characteristics are different from those in other strategic groups in the
same industry or sector (in grocery retailing industry, supermarkets, convenience
stores and corner shops each form different strategic groups).
• There are many different characteristics that distinguish between SG:
 scope of an organization’s activities (product range, geographical
coverage and range of distribution channels used);
resource commitment (brands, marketing spend and extent of vertical integration).
• SG can be mapped on to two dimensional charts – maps. These can be useful
tools of analysis.
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STRATEGIC GROUPS
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STRATEGIC GROUP ANALYSIS

• Understanding competition - enables focus on direct competitors
within a strategic group, rather than the whole industry (Tesco will
focus on Sainsburys and Asda)

• Analysis of strategic opportunities - helps identify attractive ‘strategic

spaces’ within an industry.

• Analysis of ‘mobility barriers’ i.e. obstacles to movement from one

strategic group to another. These barriers can be overcome to enter
more attractive groups. Barriers can be built to defend an attractive
position in a strategic group.
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WHO ARE STRATEGIC CUSTOMERS?

A strategic customer is the person(s) at whom the strategy is primarily
addressed because they have the most influence over which goods or
services are purchased.

Examples:
A pharmaceutical manufacturer it is the health authorities and hospitals
not the final patient.
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CRITICAL SUCCESS FACTORS (CSFs)

• Critical success factors are those factors that are either particularly valued
by customers or which provide a significant advantage in terms of cost.

• Critical success factors are likely to be an important source of competitive

advantage if an organisation has them (or a disadvantage if an
organisation lacks them).

• Different industries and markets will have different critical success factors
(e.g. in low cost airlines the CSFs will be punctuality and value for money
whereas in full service airlines it is all about quality of service).
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WHAT ARE CORE COMPETENCIES?

Core competencies are unique strengths, embedded deep within a

firm.
Core competencies allow a firm to differentiate its products and
services from those of its rivals.

Results in:
Creating higher value for the customer OR
Offering products and services at lower cost.
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COMPANY EXAMPLES OF CORE COMPETENCIES AND APPLICATIONS

COMPAN CORE COMPETENCIES APPLICATION EXAMPLE
Y
HONDA Superior engineering of small but powerful and highly Motorcycles, cars, ATVs, sporting boats,
reliable internal combustion engines. snowmobiles, lawn mowers, small aircraft, etc.

NETFLIX Superior in creating proprietary algorithms-based DVD-by-mail rentals, streaming media (including
individual customer preferences proprietary) content, connection to game consoles.

UBER Superior mobile-app–based transportation and logistics Uber, UberX, UberBlack, UberLUX, UberSUV, etc.
expertise focused on cities, but on global scale.

IKEA - Superior in designing modern functional home Fully furnished room setups, practical tools for all
furnishings at low cost. rooms, do-it-yourself.
- Superior retail experience.

COCA-COLA Superior marketing and distribution. - Leveraging one of the world’s most recognized
brands (based on its original “secret formula”) into
a diverse lineup of soft drinks.
- Global availability of products.
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LINKS TO COMPETITIVE ADVANTAGE & SUPERIOR FIRM PERFORMANCE

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RESOURCES, CAPABILITIES AND ACTIVITIES

Resources - any assets that a firm can draw on when formulating and implementing a strategy (cash,
buildings, machinery, intellectual property).

Capabilities - organizational and managerial skills necessary to orchestrate a diverse set of resources
and deploy them strategically (expressed in company’s structure, routines, and culture).

Activities - distinct and fine-grained business processes that enable firms to add incremental value
by transforming inputs into goods and services (order taking, physical delivery of products,
invoicing customers).

Key points: 1) core competencies that are not continuously nourished will eventually lose
their ability to yield a competitive advantage;
2) in analyzing a company’s success in the market, it can be too easy to focus on
the more visible elements or facets of core competencies (superior
products/services).
What is even MORE IMPORTANT is to understand the invisible part of core competencies.
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RESOURCE BASED VIEW

Resources are key to superior firm performance
Model aids in identifying core competencies

Resources fall into two categories:

Tangible
Resources that have physical attributes,
Visible.
Intangible
Resources that do not have physical attributes,
Invisible
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TWO CRITICAL ASSUMPTION OF RBV

Resource Heterogeneity:
A firm is a unique bundle of resources, capabilities and competencies;
These bundles differ across firms.
Example: Southwest Airlines and Alaska Airlines both compete in the same strategic group
(low-cost, point-to-point airlines) but draw on different resource bundle.

Resource Immobility:
Resources don’t move easily from firm to firm;
Resources are difficult to replicate;
Resources can last for a long time.
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VRIO FRAMEWOK
Tool for evaluating firm resource endowments.

According to this model, a firm can gain and sustain a competitive advantage only
when it has resources that satisfy all of the VRIO criteria.

To be the basis of a competitive advantage, resources must be:

Valuable,
Rare,
Costly to Imitate, and the firm must be
Organized to capture the value of the resource.
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VRIO DECISION TREE

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A RESOURCE IS...
Valuable if:
Helps exploit an opportunity or offset a threat.
Rare if:
Only one or a few firms possess it.
Costly to Imitate if:
Competitors can’t develop the resource for a reasonable price.
The firm is organized to capture value through:
Effective organizational structure and coordinating systems.
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CORE RIGIDITY
A former core competency:
Turned into a liability,
Result of an environment change,
No longer fits in the external environment.

Turns a resource from an asset to a liability.

The Decline of P&G:

https://www.youtube.com/watch?v=GVyvrvzxDxA
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DYNAMIC CAPABILITIES

A firm’s ability to:

Adapt resources over time
Create, deploy, modify, reconfigure, upgrade, leverage.
In consideration of the external environment.

Goal:
Develop resources, capabilities, and competencies,
Create a strategic fit with the firm’s environment,
Change in a dynamic fashion.
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DYMANIC CAPABILITIES PERSPECTIVE

A model that emphasizes a firm’s ability to:
Modify and leverage its resource base,
Gain and sustain competitive advantage in a constantly changing environment.

Dynamic markets are due to:

Technological change
Deregulation
Globalization
Demographic shifts
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RESOURCE STOCKS AND FLOWS

RESOURCE STOCKS
The firm’s current level of intangible resources:
New product development
Engineering expertise
Innovation capability
Reputation for quality

RESOURCE FLOWS
The firm’s level of investments to maintain or build a resource
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BATHTUB METAPHOR
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VALUE CHAIN
Value chain describes the internal activities a firm engages in when transforming
inputs into outputs:
Through primary and support activities.

Each activity adds incremental value:

RAW MATERIALS  COMPONENTS  PRODUCTS

Each activity adds incremental costs.

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GENERIC VALUE CHAIN

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STRATEGIC ACTIVITY SYSTEMS

SAS is a network of interconnected activities:
Socially complex and causally ambiguous,
Enhance likelihood of sustained competitive advantage.

Characteristics:
Elements can be easily observed,
How activities are managed is not easily observed,
Difficult to imitate.

How activity systems are updated:

Add new activities
Remove activities that are no longer relevant
Upgrade activities that have become stale
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THE VANGUARD GROUP’S ACTIVITY SYSTEM - 1997

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THE VANGUARD GROUP’S ACTIVITY SYSTEM - 2017

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THE ROLE OF THE BOARD OF DIRECTORS IN CORPORATE GOVERNANCE

Although senior managers have lead responsibility for crafting and executing a company’s strategy, it is
the duty of the board of directors to exercise strong oversight and see that the five tasks of strategic
management are performed in a manner that benefits shareholders, in the case of investor-owned
enterprises, or stakeholders, in the case of not-for-profit organizations.

Obligations of the board of directors:

 Oversee the firm’s financial accounting and reporting practices compliance with GAAP principles.
 Critically appraise the firm’s direction, strategy, and business approaches.
 Evaluate the caliber of senior executives’ strategic leadership skills.
 Institute a compensation plan that rewards top executives for actions and results that serve stakeholder
interests—especially shareholders.
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ACHIEVING EFFECTIVE CORPORATE GOVERNANCE

Effective corporate governance requires the board of directors to oversee the company’s strategic
direction, evaluate its senior executives, handle executive compensation, and oversee financial
reporting practices.

A strong, independent board of directors:

Is well informed about the firm’s performance.
Guides and judges the CEO and other executives.
Can curb management actions the board believes are inappropriate or unduly risky.
Can certify to shareholders that the CEO is doing what the board expects.
Provides insight and advice to top management.
Is intensely involved in debating the pros and cons of key strategic decisions and actions.