Strategy
January 21 - Afternoon
Media Management – Module 1Robin Teigland
January 2011
2
Module Overview – 1/3 Jan 21 – What is Strategy?
Individual Assignment: Readings Group Assignment: Choose your Live Case Strategic
Issue Jan 21 – External Analysis: Industry Structure
and Competition Individual Assignment: Readings Group Assignment: Cola Wars Continue
Jan 24 –Internal Analysis: Analyzing Resources and Capabilities Individual Assignment: Readings Group Assignment: Wumart Stores
Jan 25 –An Entrepreneur’s View of Strategy in 3D Individual Assignment: Readings & Questions Guest: Steve Mahaley, PeaceTrain
3
Module Overview – 2/3 Jan 26 – Recent Developments in Strategy
Group Assignment: Article summary ppt for slideshare Jan 31 – Executing Strategy
Individual Assignment – Readings & Questions Guest: Christian Björkman, MindArk Guest: Fredrik Nilsson, IC You
Jan 31 – Exploring Business Models and role of IT Individual Assignment – Readings & Questions Guest: Paul DiGangi, Western Carolina University
Feb 2 - External Drivers of Change: Exploring the Future of the Gaming Industry Individual Assignment: Readings Group Assignment: STEEP Guest: Stefan Lampinen, Speltjänst
4
Module Overview – 3/3 Feb 2 – Creating Value Networks
Individual Assignment: Readings & Questions Guest: Malin Ströman, Independent Consultant
Feb 7 - Live Case Day: Integrating Theory with Practice Group Assignment: Virtual Worlds and Gaming
Feb 9 – Module 1 “Exam”
What is strategy?
Strategy An integrated and coordinated set of
commitments and actions designed to gain a competitive advantage
Competitive advantage When two or more firms compete
within the same market, one firm possesses a competitive advantage over its rivals when it earns (or has the potential to earn) a persistently higher rate of profit
5Hitt, Ireland & Hoskisson 2006
1. Long-term goal (objective)
2. Scope of the firm
3. Competitive advantage
Components of strategy
Collis & Rukstad 2008 6
Assignment for today
What is strategy? (1 -2 slides) Based on the course readings, your previous experience,
and potentially other sources, develop your own definition of strategy.
What are the relationships between the concepts of vision, mission, strategy, and business model?
What is your organization’s strategy? (2-3 slides)
Pick an organization in the Virtual World or Gaming industries and answer the following questions based on information you find on the internet:
What is your organization’s mission? What is your organization’s business model? What is your organization’s strategy? Can you summarize the organization’s strategy in a “strategy
statement” (see Collis & Rukstad article)? 8
9
The basic framework
INDUSTRY ENVIRONMENT
• Competitors
• Customers
• Suppliers
INDUSTRY ENVIRONMENT
• Competitors
• Customers
• Suppliers
STRATEGYSTRATEGYSTRATEGY
FIRM • Goals & Values
• Resources & Capabilities
• Structure & Systems
FIRM • Goals & Values
• Resources & Capabilities
• Structure & Systems
Adapted from Grant 2008
The The LINKLINK between the between the FIRMFIRM & its & its ENVIRONMENTENVIRONMENT
10
Where does superior profitability come from?
RATE OF RETURN ABOVE THE
COST OF CAPITAL
How do we make
money?
INDUSTRY
ATTRACTIVENESS
Where should we compete?
COMPETITIVE ADVANTAGE
How should we compete?
CORPORATE STRATEGY
BUSINESS STRATEGY
Grant 2008
Focus on two models in this course
Industrial Organization (I/O)
Focuses on the environment outside the firm
Opportunities and threatsOpportunities and threats By studying the external
environment, firms identify what they might choose to do.
Resource-based View (RBV) Focuses on the inside of the
firm Unique resources, capabilities, Unique resources, capabilities,
and competenciesand competencies((required forrequired for sustainable sustainable competitive advantagecompetitive advantage))
By studying the internal environment, firms identify what they can do.
Successful strategy formulation and Successful strategy formulation and implementation actions result only implementation actions result only when the firm properly uses both when the firm properly uses both
models.models.11
Objectives of Industry Analysis (I/O)
To understand how industry structure drives competition, which determines the level of industry profitability
To assess industry attractiveness
To use evidence of changes in industry structure to forecast future profitability
To formulate strategies to change industry structure to improve industry profitability
To identify “Key Success Factors” (KSFs) for the industry
Grant 2008 12
13
How big is the profit and who is after it?
vsProfit Profit
The spectrum of industry structures
Concentration
Entry and ExitBarriers
ProductDifferentiation
Information
Perfect Competition
Oligopoly Duopoly Monopoly
Many firms A few firms Two firms One firm
No barriers Significant barriers High barriers
Homogeneousproduct Potential for product differentiation
Perfectinformation flow Imperfect availability of information
Grant 2008 14
15
Why does industry profitability differ?
Avg 24.2%
Avg 10.4%
Ave
rage
RO
E 1
982-
1993
Porter
16
Porter’s five forces of competition
ENTRANTS
SUPPLIERS BUYERS
SUBSTITUTES
INDUSTRYCOMPETITORS
Rivalry amongexisting firms
Threat of new entrants
Threat of substitutes
Bargaining
power of suppliers
Bargaining
power of buyers
http://www.youtube.com/watch?v=mYF2_FBCvXw&feature=channel
17
Industry definition
Technology (GSM)
Buyer (Needs driven)
Geography (US, Sweden)
““A group of firms producing products A group of firms producing products that are close substitutes for each that are close substitutes for each
other”other”
Porter
How to draw the industry boundaries?
•What industry is BMW in?– World auto industry– European auto industry– World luxury car industry?
•Key criterion is SUBSTITUTABILITY– On the demand side: Are buyers willing to substitute
between types of cars and across countries?– On the supply side: Are manufacturers able to switch
production between types of cars and across countries?
•The industry may need to be analyzed at different levels of aggregation for different types of decisions
Grant 2008 18
• Unit of analysis within industry is business unit, not the company (although the two may coincide)
• Industry competitors are actors (BUs) that have core business within the industry
• Define ‘the middle’, industry competitors, as narrowly as possible
• It may be practical to subdivide the industry competitors into strategic groups
Theory-in-practice/rules of thumb
19
20
Threat of new entrants High capital requirements High economies of scale Strong customer loyalties High switching costs High product differentiation Limited access to
distribution channels High legal/regulatory
barriers Large cost disadvantages
independent of scale Ex. Proprietary technology, raw
materials, location, learning curve, government subsidies
Strong retaliation by industry participants
What keeps new competitors out - barriers to entry?
Porter
21
Rivalry between established competitors
Numerous or equally balanced competitors
Slow industry growth High fixed costs Lack of differentiation or
switching costs Capacity augmented in large
increments High strategic stakes High exit barriers
What makes competitors
“fight” harder?
Porter
The Industry Life Cycle
Introduction Growth Maturity Decline
Industry Sales
Time
Grant 2008 22
25
Bargaining power of buyers
Buyer’s price sensitivity Relative bargaining power
• What is cost of product as % of buyer’s total costs?• How differentiated is the purchased item? • How intense is competition between buyers? • How important is the item to the quality of the buyer’s own output?
•What is the size and concentration of buyers relative to sellers?•What are buyer’s switching costs?•What is buyer’s information?•What is buyer’s ability to backward integrate?
Porter
Who decides the price?
26
Bargaining power of suppliers
Supplier’s price sensitivity Relative bargaining power
•What is cost of supplies as % of supplier’s total sales?•How differentiated is the supplied item?•How intense is competition between suppliers?
•What is size and concentration of sellers relative to buyers?•What is supplier’s information?•What is supplier’s ability to forward integrate?
Porter
Who decides the price?
27
Threat of substitutes
Existence of substitutes puts ceiling on prices that can be charged
•Same function•Train/plane/car/ICT
•Better price-performance•Books/videos•Record-players/CD-players•Security guards / electronic alarm systems
Point A ?
Porter
How “easy” is it to switch?
Point B
Threat of
Potential
Entrants
Bargaining Power of Buyers
Bargaining Power of Suppliers
Threat of Substitute
s
Rivalry Between
Competitors• Identify Competitors and
intensity of Rivalry amongst competitors.
• Briefly explain.
•Identify Buyers and Bargaining Power of each. •Briefly explain.
What business segment or industry is being considered:
___________________________________________
•Identify Suppliers and Bargaining Power of each. •Briefly explain.
•Identify Substitutes and the threat level of each. •Briefly explain
•Identify Potential Entrants and the threat level of each. •Briefly explain.
Is this an attractive industry? Briefly explain, why or why not?
___________________________________________
Process steps:1. Identify industry or segment boundaries.2. Identify players in each Force using case facts.3. Assess level of threat, power, intensity of each
Force using case facts and course concepts.4. Make final assessment of whether it is an
attractive industry in which to compete using results of 5 Forces analysis to support your view.
Industry Level Analysis: Porter’s Five Forces
28
29
How does the environment (PESTEL)affect the five forces (now and in future)?
Johnson & Scholes 1997
Politics and government
Environment Technology
Legal structure
Social and Demographic
structure
International/nationaleconomy
Industry(Five Forces)
30
1. What factors are affecting the industry?2. Which of these are the most important at the present time?3. Which of these are the most important in the next few years?
Political Global, regional, and national
political development (administration, political parties)
Taxation policy Foreign trade regulations Labour market politics Government stability
Socio-cultural Population demographics Income distribution Social mobility Lifestyle changes Attitudes to work and leisure Attitudes to consumerism Levels of education Changes in values/attitudes Education conditions Work environment conditions Health conditions
Environmental Ecology Pollution conditions ”Green” energy Energy conservation Waste handling
Economic Business cycles GNP trends Interest rates & Exchange rates Money supply Inflation Unemployment Wage level Private consumption and
disposable income Public finances Energy availability and cost
Technological Government spending on research Government and industry focus of
technological effort New discoveries/development Speed of technology transfer Rates of obsolescence New patents and products
Legal Development in price and
competitive legislation Labour market legislation Product safety and approvals
Applying five-forces and PESTEL analyses
1) Forecasting industry profitability
• Past profitability is a poor indicator of future profitability.
• If we can forecast changes in industry structure, we can predict the likely impact on competition and profitability.
• What are trends that are changing industry structure?
• How will these effect industry profitability?2) Developing strategies to improve industry
profitability
• What forces are depressing profitability?
• Which of these forces can be changed by individual or collective strategies?
Grant 2008 31
Improving profitability
Building defenses Increase expected retaliation (signaling) Lower inducement for attack (making industry not so
profitable to enter) Influencing the balance - Offensive
Innovations in marketing to raise brand identification or otherwise differentiate the product
Capital investments in large-scale facilities or vertical integration to affect entry barriers
Exploiting industry change What trends/industry changes affect the sources of
competition? What is the long-run profitability of the industry?
Porter 32
33
How can we improve industry profitability?
THREAT OF ENTRY•Capital requirements•Economies of scale•Customer loyalties
•Switching costs•Product differentiation•Access to distribution
channels•Legal/ regulatory barriers
•Cost disadvantages independent of scale
•Retaliation
SUBSTITUTECOMPETITION
• Buyers’ propensity to substitute
• Relative prices & performance of
substitutes
BUYER POWER• Buyers’ price sensitivity
• Relative bargaining power
INDUSTRY RIVALRY•Concentration
•Diversity of competitors
•Product differentiation•Excess capacity &
exit barriers•Cost conditions
SUPPLIER POWER• Suppliers’ price sensitivity • Relative bargaining power
Porter
Threat of
Potential
Entrants
Bargaining Power of Buyers
Bargaining Power of Suppliers
Threat of Substitute
s
Rivalry Between
Competitors• Identify Competitors and
intensity of Rivalry amongst competitors.
• Briefly explain.
•Identify Buyers and Bargaining Power of each. •Briefly explain.
What business segment or industry is being considered:
___________________________________________
•Identify Suppliers and Bargaining Power of each. •Briefly explain.
•Identify Substitutes and the threat level of each. •Briefly explain
•Identify Potential Entrants and the threat level of each. •Briefly explain.
Is this an attractive industry? Briefly explain, why or why not?
___________________________________________
Process steps:1. Identify industry or segment boundaries.2. Identify players in each Force using case facts.3. Assess level of threat, power, intensity of each
Force using case facts and course concepts.4. Make final assessment of whether it is an
attractive industry in which to compete using results of 5 Forces analysis to support your view.
Industry Level Analysis: Porter’s Five Forces
34
Coca-Cola vs Pepsi Case (max 15 min) Q1. Is the concentrate industry profitable? Use Porter’s five-
forces analysis to analyze the concentrate business. Put the concentrate producers in the center of the model as the industry incumbent/rivals. What are the five forces and key underlying structural determinants of each of the five forces? What are the implications for the relative power of each force? Based on this analysis, how attractive is this industry? In other words, how high is the profit potential of the industry competitors? What are the elements of your analysis that lead you to this conclusion?
Q2. Why is profitability so different between the concentrate business and the bottling business? Repeat the above five-force analysis for the bottlers. How do the economics of the concentrate business compare to the bottling business? Which industry is more attractive?
Q3. What challenges face these companies today? How has competition between Coke and Pepsi affected industry profits? What factors are affecting industry profitability? How can the five-forces analysis help you to answer these questions? 35
Upload to www.slideshare.net and elearning platform by 15:00.
Videos
Bottling company http://se.youtube.com/watch?
v=s5LFBW8zxqw&feature=PlayList&p=4C07105BE049A539&playnext=1&index=4
Coke vs Pepsi http://www.youtube.com/watch?
v=EMo6o0BtFG8&feature=related
36
The world’s most valuable brands, 2006
Rank Company Brand Rank Company Brand value value ($bn.) ($bn.)
1 Coca-Cola 67.5 11 Mercedes Benz 20.0 2 Microsoft 59.9 12 Citi 20.0 3 IBM 53.4 13 Hewlett-Packard 18.9
4 GE 47.0 14 American Express 18.6 5 Intel 35.6 15 Gillette 17.5 6 Nokia 26.5 16 BMW 17.1 7 Disney 26.4 17 Cisco 16.6 8 McDonald’s 26.0 18 Louis Vuitton 16.1 9 Toyota 24.8 19 Honda 15.810 Marlboro 21.2 20 Samsung 15.0
Interbrand37
http://money.cnn.com/2006/02/01/news/companies/pepsi_fortune/
http://www.youtube.com/watch?v=4_EfniTmakQ
38
Threat of
Potential
Entrants
Bargaining Power of Buyers
Bargaining Power of Suppliers
Threat of Substitute
s
Rivalry Between
Competitors• Identify Competitors and
intensity of Rivalry amongst competitors.
• Briefly explain.
•Identify Buyers and Bargaining Power of each. •Briefly explain.
What business segment or industry is being considered:
___________________________________________
•Identify Suppliers and Bargaining Power of each. •Briefly explain.
•Identify Substitutes and the threat level of each. •Briefly explain
•Identify Potential Entrants and the threat level of each. •Briefly explain.
Is this an attractive industry? Briefly explain, why or why not?
___________________________________________
Process steps:1. Identify industry or segment boundaries.2. Identify players in each Force using case facts.3. Assess level of threat, power, intensity of each
Force using case facts and course concepts.4. Make final assessment of whether it is an
attractive industry in which to compete using results of 5 Forces analysis to support your view.
Industry Level Analysis: Porter’s Five Forces
39
Lessons … managers must: Understand the structure of the industries in
which they compete (& why the structure is what it is).
Direct attention to the most significant force. Be aware of how their industry might change. Develop the power to shape the structure of the
industry. Make sure that strategic moves do not undermine
the attractiveness of the industry.
Industry Level Analysis: Porter’s Five Forces
40Hitt, Ireland & Hoskisson 2006
Improving profitability
Building defenses Increase expected retaliation (signaling) Lower inducement for attack (making industry not so
profitable to enter) Influencing the balance - Offensive
Innovations in marketing to raise brand identification or otherwise differentiate the product
Capital investments in large-scale facilities or vertical integration to affect entry barriers
Exploiting industry change What trends/industry changes affect the sources of
competition? What is the long-run profitability of the industry?
Porter 41
42
KEY SUCCESS FACTORS
What are the Key Success Factors (KSFs) in the industry?
Analysis of demand
• Who are our customers?
• What do they want?
Analysis of competition
• What drives competition?
• What are the main dimensions of competition?
•How intense is competition?
•How can we obtain a superior competitive
position?
What do customers want?
How does the firm survive competition?
Pre-requisites for success
Grant 2008
43
Steel industry – Key Success Factors What do customers want?
Customers include auto, engineering, and container industries
Customers acutely price sensitive and require product consistency and reliability of supply
Specific technical specs required for specialty steels How does a firm survive competition?
Compete primarily on price Intense due to high fixed costs, low cost imports, high exit
barriers, and entrance of minimills due to new technology Logistics due to high transport costs and scale economies
important What are the Key Success Factors?
Cost efficiency through scale-efficient plants, low cost location, rapid adjustment of capacity of output, efficient use of labor
Possibility for differentiation through quality, service, and technical factors
Grant 2008
ROCE
Return on Sales
Sales/Capital Employed
Sales mix of products
Avoiding markdowns throughtight inventory control
Max. buying power to minimizecost of goods purchased
Max. sales/sq. foot through:*location *product mix*customer service *quality control
Max. inventory turnover through electronic data interchange, closevendor relationships, fast delivery
Minimize capital deploymentthrough outsourcing & leasing
Identifying KSFs by analyzing profit drivers
Retailing
44Grant 2008
Strategic groups
Strategic group: A group of firms in an industry that follow the same or similar strategies
Identifying strategic groups:
• Identify principal strategic variables which distinguish firms
• Position each firm in relation to these variables
• Identify clusters
Grant 2008 45
Industry competition: Strategic groupsS
trate
gic
Dim
en
sion
Strategic dimension
Low
High Low
High Some dimensions• specialization• quality• vertical integration• service• tech. leadership• distribution channels• geography
Porter 46
Strategic groups in the world auto industry
Broad
PRODUCTRANGE
Narrow
National GEOGRAPHICAL SCOPE Global
NATIONALLY- FOCUSED, SMALL, SPECIALIST
PRODUCERS e.g., Bristol (U.K.), Classic Roadsters
(U.S.), Morgan (U.K.)
NATIONALLY FOCUSED, INTERMEDIATE LINE
PRODUCERS
e.g. Tofas, Proton, Maruti
First Auto Works (China)
REGIONALLY-FOCUSED BROAD-LINE PRODUCERS
e.g. Fiat, PSA, Renault, Kia,
PERFORMANCE CAR PRODUCERS
e.g., Porsche, Ferrari (owned by
Fiat) Maserati, Lotus
LUXURY CAR MANUFACTURERS
e.g., Aston Martin, BMW, Rolls Royce (owned by VW)
GLOBAL SUPPLIERS OF NARROW MODEL RANGE e.g., Subaru, Isuzu, Suzuki,
Saab, Hyundai, Daihatsu
GLOBAL, BROAD-LINEPRODUCERS
e.g., GM, Ford, Toyota, Nissan, Honda, VW,
DaimlerChrysler
Grant 2008 47
48
Objectives of Industry Analysis (in summary) To assess industry attractiveness
To understand how industry structure drives competition, which determines the level of industry profitability
To forecast industry profitability Past profitability is a poor indicator of future profitability But if we can forecast changes in industry structure, we can
predict likely impact on competition and profitability To devise strategies to change industry structure to
improve industry profitability Which forces are depressing profitability? Which of these can be changed by individual or collective
strategies? To determine key success factors
What are the starting points for the analysis of competitive advantage?
Grant 2008
49
Module Overview – 1/3 Jan 21 – What is Strategy?
Individual Assignment: Readings Group Assignment: Choose your Live Case Strategic
Issue Jan 21 – External Analysis: Industry Structure
and Competition Individual Assignment: Readings Group Assignment: Cola Wars Continue
Jan 24 –Internal Analysis: Analyzing Resources and Capabilities Individual Assignment: Readings Group Assignment: Wumart Stores
Jan 25 –An Entrepreneur’s View of Strategy in 3D Individual Assignment: Readings & Questions Guest: Steve Mahaley, PeaceTrain
Wu Mart1. What are the sources of Wu Mart’s competitive advantage?
Identify the principal resources and capabilities that form the basis of Wu Mart’s competitive advantage.
Are Wu Mart’s resources “competitively superior” to other competitors at the time of the case?
2. How sustainable is Wu Mart’s competitive advantage domestically?
Is its position sustainable when challenged by international entrants? To what extent is Wu Mart’s competitive advantage sustainable?
3. Will Wu Mart be able to transfer its competitive advantage it has in China to other countries?
Will it be able to leverage the same resources and capabilities that it has in China in other markets?
Are Wu Mart’s resources and capabilities specific to China or emerging markets?
4. Looking into the future, what should Wu Mart do to sustain its performance?
What challenges does it face? How can it defend against competitive (and other) threats?
50
Wu Mart Case Assignment
Questions 1& 2 You are a consulting company asked by Wal-
Mart’s top management to conduct a competitor analysis of Wu Mart. Prepare a presentation for Wal-Mart’s top management.
Questions 3 & 4 You are Wu Mart internal consultants asked by top
management to look into an international expansion strategy. Prepare a presentation for Wu Mart’s top management.
51http://www.flickr.com/search/?q=wumart
52
Sources Collins, JC & Porras, JL, Built to Last, Harper-Business, 1998. Collis, DJ & Rukstad, MG, Can You Say What Your Strategy Is?, HBR, April 2008 Grant, R. Contemporary Strategy Analysis, Blackwell, 2008. Harreld, JB, O’Reilly, CA, & Tushman, M., Dynamic Capabilities at IBM: Driving
Strategy into Action, California Management Review, 2007. Hay, D., Scheving, H., Berlin, U., Ekelöf, P., Kristenson, J., Ohrling, M., Live Case –eZ
Sweden, 2009. Holde, S. Strategic Innovation and Business Creation, Århus School of Business,
2002. Magretta, J, Why Business Models Matter, HBR, 2002. Mannerheim, F., Postoaca, A, Åresund, L., Live Case – eZ Poland, 2008. McGee, J., Thomas, H. & Wilson, D. Strategy: Analysis and Practice, McGraw-Hill,
2005. Norman, R. & Ramírez, R. From Value Chain to Value Constellation: Designing
Interactive Strategy, HBR, 71,4, 1993. Organizational Strategy, Thomson Learning, 2005. Pfeffer, J. Managing with Power, HBS, 1992. Porter, ME. Competitive Strategy, Free Press, 1980. Porter, ME. What is Strategy? HBR, Nov-Dec, 1996. Woodruff, RB. Customer Value: The Next Source of Competition, Academy of
Marketing Science, 1997.