Business Strategy

What is management?

Planning

Management mostly plans. The planning: defines goals, establishes strategy, develops plans.

Planning is necessary because:

• Provides direction
• Reduces waste and redundancy
• Everyone on the same page

Planning does not eliminate uncertainty.

Usually the top managers make strategic planning. Middle managers do functional planning. Team leads do tactical / operational.

Strategic Plans

Strategic plans usually impact the organization broadly. They are the most important and the top. Finds and initiates competitive advantage. Finds new markets, or to exit old markets. Might have several years timeline.

Business level strategy is for a single product market and wants competitive advantage.

Corporate level strategy is for multiple industries and markets. You try to figure out firm scope and resource allocation.

Functional Plans

Smaller than strategic but support strategic plans. Usually about 1+ year timeline. Drive budget and staffing plans.

Functional happens at a corporate level, not various businesses or strategic business units. Corporate does the scope of the firm and the allocation of resources.

Thinking about product, price, place, and promotional considerations.

Tactical / Operational Plans

Narrow and specific impact on firm. Short timeframe. They don’t consider the “what if’s” of business.

Organizing

Management then organizes which is giving people the tasks to do the plans .

Leading

Management then leads by motivating employees, communicating well, and fixing problems/conflicts.

Controls

Management finishes by controlling which is the process of monitoring performance and comparing to the goals, and correcting if needs be.

Types of Organizational Structures

Tall / Hierarchical

Lots of middle management. Inefficient bureaucracies. Senior management make most the decision. Management has to sign off on stuff. Information flows from Top Down. Claimed to work well in stable environments.

Flat / Networked

Employees are empowered to make decisions. Information can flow Top Down, or bottom up. Few levels of middle management.

Strategy as Planned Emergence: less formal planning and an idea can come from anywhere with discretionary budgets. Can shape the firm’s overall strategy.

What is Strategy?

Goal-directed actions to gain and sustain superior performance.

Competitive Advantage

Competitive Advantage: superior performance relative to other companies within the same industry. If a company has higher profitability than a competitor, it is said to have competitive advantage.

An intangible resource is more likely to create a sustainable competitive advantage.

Competitive advantages are determined by the characteristics of both the industry and the firm.

Cost Leadership

Cost Leadership: becoming the low cost producer in industry. Usually obtained by a combination of efficiency and experience. Pricing is at or below industry standard.

Manufacturing simplicity, tight control on all production, efficient sales facilities, technology to reduce operating costs. Lack of advertising.

COST is the key.

IKEA: IKEA has customers shop alone, assemble, they use cheap materials, have warehouse and store the same place, bulk manufactured, ect.

Lowest cost does not always equal lowest price. It’s about having the lowest cost to make. The lowest cost could have good brand and price high. Or a brand could try to get more customers and have a low price even if they are not the lowest cost.

There’s always a risk that anything will erode margins (like new production or technology) which is bad for cost leaders.

Differentiation

Differentiation: is competitive advantage achieved through be unique in a broad market that allows you to price at a premium.

VALUE is the key

Tesla: Teslas are expensive, but they have batteries, they’re electric, they’re sleak, the doors open crazy, they have a tablet.

A Business Model is the end results of decisions and tradeoffs made by management in formulating strategy.

Combination strategies are often more difficult because they are inherently contradictory.

Productivity Frontier: the best possible strategic positions that a girm can take relating to value and low cost. It is a concave curve.

SWOT

SWOT = Strengths / Weaknesses / Opportunities / Threats

The 3rd step is to identify the company’s strengths and weaknesses.

Outstanding brand, experienced and successful management team, lots of cash, and good operating procedures are strengths.

Scenario Planning

Scenario planning resolves uncertainty by developing alternate futures. Most uncertainty comes from external forces.

It’s important to consider external environments when doing internal analysis.

External Environment

There is the Firm -> Market -> Industry -> General Environment.

PESTEL Analysis

Political, Economic, Socio-Cultural (Demographic), Technological, Ecological, Legal (Ethical).

PESTEL analysis tries to find “macro-factors” that impact the industry. Note the only thing to not be considered is Taxation Policy.

The economic force impacts disposable consumer and discretionary between income and spending.

Structure-Conduct-Performance Model (SCP)

Structure: number of competitors, cost of entry, economics of supply and demand

Conduct: Branding, capacity, innovation, operating efficiencies

Performance: Profits, value ccreation, industry performance, shareholder returns

Competitors

Monopoly: No competition, pricing power, unique product, very high entry barriers, high profitability. Think vaccine and medical patents.

Oligopoly: Few big firms, high entry, differentiated product, some pricing power. Think Coke and Pepsi.

Monopolistic: Many firms, some pricing power, differentiated product, medium barrier to entry. Think Georgia Tech.

Perfect: Many small firms, low entry barriers, low profitability, commodity products, firms are price takers. Think farming.

Rivalry among competitors increases as exit barriers increase, industry concentration decreases, and industry growth slows.

If there is very high market growth rates, then you won’t have competition. If you have high barriers to exit, low brand loyalty, and perishible goods, then you’re competitive.

Porter Five Forces Model

1) Threat of New Entrants 2) Bargaining Power of Buyers 3) Bargaining Power of Suppliers 4) Threat of Substitute Products 5) Rivalry Amoung Existing Competitors

Concentration Ratio

A concentration ratio is the ratio of the market share of the top 4 players to the entire market.

Getting new core business lines, extending existing product lines, and running campaigns are all forms of concentration.

Switching Costs

Switching costs are the costs a consumer incurs as a result of changing brands.

Complements

Complemenet is a product or service that adds value to the original product when the two are used in tandem. Like video games and consoles, app store and iPhones, ect. Coke does marketing and distribution.

Substitute Products

The more substitutes a product has, the more elastic the demand curve will be. When a product has many close subs, the customer is more likely to switch to alternatives if the price were to increase. More substitute products make it difficult for producers to raise prices.

Core Competencies

Unique strengths that drive competitive advantage

Resources

Tangible and intangible assets to the firm. Amazon has Cloud

The resource-based view relies on tangible and intangile resources must be heterogeneous and immobile.

Capabilities

Organizational and managerial skills. Things the organization does

Activities

Transform inputs into outputs.

Primary activities include things like: Sales and Marketing, Manufacturing, Customer Service. It odes not include Human Resources and Accounting.

VRIO Analysis (Valuable, Rare, Costly to Imitate, Organized to capture value)

VRIO analysis is a model to determine competitive advantages.

You’ll always have sustained competitive advantage if you’re: 1) Valuable

2) Rare

3) Costly to Imitate

It can be hard to imitate if:

• if they’ve been there forever (historical)
• its hard to know what the cause is (causal ambiguity)
• there’s a culture associated with it (social complexity)

4) Organized to Capture Value

A strategic group is multiple firms within a specific industry that pursue a similar strategy.

The stronger the industry forces, the more overall profitability is driven down.

Strong brand and customer loyalty, patents, IP, and asset specificity leads to significant barriers to entry. This often makes the industry more attractive.

Operational effectiveness is a ratio to show a firm is efficiently using its resources.

Stability Strategy

A strategy that is characterized by an absence of significant change. You don’t expect any significant changes in the external environment. Focus on efficiency or pause to consolidate recent growth. Want to conserve cash. Little to no growth prospects. Industries include dairy farming, alcohol, and firearms.

Renewal Strategy

A strategy that is characterized by an absence of significant change. You’re defensive. Bankruptcy mostly. Usually because you’re reducing the size. Think Sears, Delta, Toys R Us.

If you’re in bankruptcy but hoping to come out the other end as a more financially viable firm with better skills, you’re in turnaround strategy.

Growth Strategy

A strategy that is characterized by a business expanding into markets or industries, or the services or products. Usually you can make more money in these systems (more products, scale efficiency).

You can grow by diversification, concentration, vertical integration, horizatonal integration.

Inorgantic growth is through acquisitions. Organic growth is through new Capabilities.

Horizontal Integration

Mergers or acquisitions where a company grabs a similar company within the industry. Could lead to the formation of a monopoly.

Mergers are when two companies join together to make a new combined firm.

Acquisition is when a larger firm buys a smaller, and adds them into the larger firm. The smaller firm no longer exists.

Vertical Integration

A firm acquires business operations in the resource or product stand point. You can get things like raw materials, components, parts (backward). Or you can do things like marketing, sales, supply chain, service (forward).

Hoping to reduce costs. Hoping not to lose core competencies.

Forward/Backward Integration

Forward integration is a business strategy that involves the form of a vertical integration to control the distribution / products. It is good when you don’t have the ability to distribute very well and distributors make a lot of money.

Forward = Distributor.

Backward integration is vertical integration to control the demand and reactants and materials. Costco has a Nebraska supply chain for its $5 Rotisserie Chickens. This is useful when supplier prices are not stable, suppliers have big margins, the supplier is not reliable.

In backward, you do make vs buy analysis. Do you make the stuff? Or should you just buy it?

Diversification

A firm enters a market or industry that is separate from their core business. Alphabet, Honeywell, Amazon, Disney all are diverse.

Spanx, Roku, Crocs, and Tesla are all single product line firms.

If you’re +95%, you’re a single line of business. If you’re 70%-95%, then you’re a dominant business. If you’re under 70%, you’re a diverse company.

Geographic Scopes

Local: Moxie Burger - 2 locations within a city Regional: In and Out Burger - West Coast Global: McDonalds - World

Red Ocean vs Blue Ocean

Red Ocean:

compete in an existing market, beat the competition, exploit existing demand, make value-cost tradeoffs, do cost or differentiation.

Blue Ocean:

create an uncontested market, make competition irrelevant, create and capture new demand, innovation.

It combines differentiation and cost leadership using innovation. Ignores the Porter forces.

You could be too early, too new, too different, give up too soon, misread the market