CLASS 1

CONTENT OF STRATEGY

Definition: A firms strategy is the set of choices it makes about where and how to compete;
Choices fall into 3 main areas:
1. Fulfillment/ Activities/policies:
How will we realise/deliver/fulfil this scope?
cover all functions, organization design, management processes etc.:
a. production, operations,
b. development,
c. marketing communications,
d. organisational design
e. management processes
Strategy requires integration across all aspects of firm management
Strategy is in the realm of general management (beyond functional management)
Essentially internally focused

2. Scope or Market positioning:

a. Who? (which customers)
b. What? (what products/services; what features, what pricing)
c. Where? (what geographic scope)
Essentially external-facing

3. Objective
a. Role of Aspirations in Strategy: what do we mean by aspirations?

Mission/Vision aspirations would appear to be a prerequisite for a strategy: Without

aspiration, what is strategy trying to achieve?
Mission, Vision aspirations can do two useful things
o Provide motivation for a strategy (a motivating aspiration) o E.g. seek out new
ways of doing things (innovation)
o Describe what the strategy should be (at some high level) (a strategic aspiration)
Most Mission/Vision aspirations either motivate strategy or define strategy at high level
They rarely do both Some do neither
What do you think of the following mission or vision statements (i.e. do they help to motivate
and/or define strategy)?
 Build the best product, cause no unnecessary harm, and use business to inspire and
implement solutions to the environmental crisis (Patagonia)
We will build a car for the great multitude ... it will be so low in price that no man making
good wages will be unable to own one ..... (Henry Ford)
To become the worlds leading energy company (Enron)

What do you think of the following values statements?

Bank of America (Core Values)
o WE DELIVER We deliver for our customers, clients and shareholders. We share a
passion for serving the financial needs of people, companies and institutional
investors.
o TRUST We trust in our team. We work together around the globe to deliver the
full capabilities of our company to all of our constituents. We strive to be consistent
and straightforward in our interactions.
o EMPOWERMENT We embrace the power of our people. We value our
differences, understanding that diversity and inclusion are good for business and
make our company stronger.
o RESPONSIBILITY We act responsibly. We are aware that our decisions and actions
affect peoples lives every day. We hold ourselves accountable for the disciplined
management of risk and for doing the right thing.
o OPPORTUNITY We promote opportunity. We are committed to helping each
other achieve our potential in order to build a better future for the customers,
clients, shareholders and the communities we serve.
My view:
Explicit aspirations (mission, vision or values) can be valuable from a
strategy viewpoint if they either motivate or help to define broad strategy
To be useful, aspirations must be:
o Meaningful (differentiated)
o Widely shared by employees
o Consistent with strategy
Many aspirational statements are ineffective!
Explicit aspirations are not essential for good strategy, but many highly
successful companies do have good ones

b. What is the overall goal of strategy (in competitive business context)?

Many possible (generic) goals:
- Growth
- Survival
- Above-normal profitability (e.g. ROCE which produces positive economic profit)
- Absolute size of profits
- Environmentally sustainable operations
- Make positive impact on society
- High value created for customers,
Most strategists now believe that the prime objective of strategy is:
ABOVE-NORMAL PROFITABILITY: pre-requisite to achieving other goals
o funds for growth,
o defending against competition,
o making contributions to society
o etc.
Why do we focus on superior profitability? Investors base their decisions largely on ROE
 Strategists tend to ignore differences in leverage and focus on ROCE
We are concerned with profitability (ROCE), not absolute profits
The forces of competition tend to drive profitability down to normal levels i.e. profit = cost of
capital Zero economic profit
Hence real value creation for investors requires superior (above-normal) profitability
o Positive economic profit

Strategy process: A firms strategy is the set of choices it makes about where and how to compete;

Business Strategy versus Corporate Strategy:

o Corporate strategy: What businesses should the overall corporation be in? How should those
businesses be managed? (Corporate center)
o Business strategy: Where and how to compete in a distinct business (Divisions)

SWOT FRAMEWORK
While at a more detailed level, strategy is about achieving sustained, superior profitability (i.e. per unit,
ideally ROCE)
At a broad level (10,000m), strategy should align the firms strengths/weaknesses with the
opportunities/threats in its business environment.
 The SWOT Frameworks is one of the first ever tool developed to helping firms develop sound strategy
was the SWOT framework where SWOT stands for strengths, weaknesses, opportunities and threats.
The SWOT framework is based on 3 fundamental premises (assumptions)/underlying principles about
what strategy in a competitive business setting is about:
1. Business success is about developing some distinctive strengths something you do (or possess)
which is better than competitors (valuable distinctiveness relative to other firms);
This distinctiveness could be in terms of proprietary technology or a well-known and valued
brand; it could be in terms of access to proprietary inputs such as low cost raw materials or
privileged locations. It could be in terms of a distinctive capability (e.g. the ability to come up with
radical innovations) or high market share which confers a unit cost advantage.
Strategy thus needs to be based on some understanding of the particular firms strengths;
It should also take into account its weaknesses, i.e. aspects of the firm where it appears to be
inferior to competitors.
2. Business success is about spotting and capitalizing on opportunities for new/ improved products,
processes, business models;
Firms exist in a business environment. While some aspects of this environment social, political,
macro-economic are most meaningful at a country or region level, it is the industry or segment
level that are generally of most interest to the strategist. It is at the industry or segment level that
companies focus on specific customer needs/wants, take advantage of relevant technology, deal
with the regulatory context and cope with competitors.
Successful firms are those which identify opportunities to provide new/enhanced products.
Tough to make good profits from merely copying established firms!
Customer needs/preferences, technology, competition are always evolving!
Successful firms are also aware of threats which could adversely affect the current strategy, for
example if competitors adopt a new, superior technology or if new competitors from low labour
cost countries enter the industry.
3. Business success is about aligning strengths and opportunities while being resilient to threats:
Successful firms are those that achieve and maintain a good match between the opportunities
and threats (O&T) that they see in their environment and their own distinctive strengths and
weaknesses (S&W)
This becomes challenging when you consider that the business environment is continually
evolving with changing customer preferences, technologies, regulation and competitors.
Theses premises do two things suggest a role or purpose for strategy to achieve and maintain an
alignment between S&W and O&T over the long term and they suggest that sound strategy needs to be
based on a good understanding of S&W and O&T;

While O&T is common to all firms in the industry, though the significance vary by firm, the S&W are
specific to a particular firm.
This leads directly to the idea that SWOT analysis the systematic identification of the firms
 strengths and weaknesses and the opportunities and threats in the firms business environment is
a valuable piece of analysis to do before deciding what strategy to pursue.
SWOT analysis can be useful across the strategy process:

Limitations of SWOT analysis:

o Often ends up a laundry list of items
Hard to tell whats really important / significant
Hard to make an overall judgment on whether strategy will be successful or not
o In particular, companies typically list many strengths
Without assessing if each strength is really important and competitively
differentiating

THE VALUE FRAMEWORK

At a more detailed level, strategy is about achieving sustained, superior profitability (i.e. per unit, ideallyn
ROCE)
Customer value (per unit): The maximum amount a customer is willing to pay for the product or service in
 question
Depends on:
o customers financial position and preferences
o Substitute products/services In strategy analysis, we need to decide the dividing line
between competing products/services and substitutes (gyms)
Supplier cost (per unit): The minimum amount that a supplier is willing to charge for their particular input
Depends on: Substitute uses for that input In strategy analysis, we need to recognize that
suppliers includes all the people who work for the company (i.e. includes people who supply their
labour)
Three Key Questions for Strategists:
1. How can we create more value than competitors?
i.e. achieve a wider gap between CV and SC (than key competitors)
If this is the case we say we have achieved a value creation advantage
2. How can we ensure that we capture a good part of this value?
Ideally achieve a bargaining advantage(relative to key competitors)
Avoid high rivalry (which hurts all competitors)

Value creation advantage +/- bargaining advantage = Net competitive

or disadvantage
(gap between CV and SC
relative to competitors)
advantage
or disadvantage (do we or disadvantage (gap between
capture more or less RP and AUC relative to
from buyers or suppliers competitors)
relative to competitors)

3. How can we ensure that our advantage can be sustained for a reasonably long period of time?

How do customers decide what to buy? Buyers make their purchase decision based on the gap between CV
and Price (relative to the gap available from substitute products). In this example, customer should
logically buy product B (even though CVB is lower than CVA) as it provides greater net value
 A firm is said to have a competitive advantage if it achieves a wider gap between Customer Value (CV) and
Supplier Cost (SC) than close competitors
Having a wider gap is good but it must be resilient in the face of likely competitor reaction
VALUE CREATION
Value Creation Advantage:
A widely accepted goal of strategy is to create a value creation advantage over close competitors
A firm is said to have a value creation advantage (in a business) if it has achieved a wider gap
between CV and SC than that achieved by close competitor
In this example, Firm X has a wider gap (than Firm Y), hence has a Value Creation Advantage

Seven Sources of a Value Creation Advantage:

1. Distinctive design of choices
2. Proprietary technology/knowhow
3. Superior inputs
4. Superior brand/reputation
5. Superior execution
6. Superior volume
a. Economies of scale
b. Experience/learning
c. Network effects
d. Switching costs
7. Broader Scope
 Generic routes to value creation:

Generic Strategies:

Companies can focus in terms of Product/service Customers Geography

Companies can focus with the aim of Low cost OR Differentiation

A numerical example showing how to identify the sources of a net competitive advantage
Assume we have two firms, company A and company B making broadly similar products. Assume that the
following are per unit data (could think of them as $ amounts) for a similar transaction.

Strategy mapping = identifying what a companys strategy really is

Assessing whether we have a competitive advantage or not
 Relative Unit Cost analysis (cost modelling)
Relative Customer Value analysis (the Value Profile)
Assessing how competitors are likely to respond
T Quantitative (payoffs to alternative courses of action)
T Qualitative (identify what is likely to drive a competitors behavior)

The Strategy-Outcome Model: Strategists make set of choices which they believe will deliver superior
profitability
Given competitive context
Intermediate outcomes are outcomes that are significant in driving profitability
Important to identify/recognize them!

VALUE CAPTURE
The Value Framework focus now on Value Capture
 What characteristics determine the Relative Power of Suppliers?
SUPPLIERS MORE POWERFUL IF:
Supplier industry is more concentrated than buying industry
Supplier doesnt depend heavily on the buying industry (e.g. small part of output)
Buyers have significant switching costs
Suppliers product is differentiated
Lack of acceptable substitutes (for the supplied product)
Suppliers have a credible threat of forward integration
What characteristics determine the Relative Power of Buyers?
BUYERS MORE POWERFUL IF:
Few buying firms, many selling firms
Product is undifferentiated
Buyers face few switching costs
Buyers have credible threat of backward integration
Buyers are price sensitive
Product is large part of buyers cost
Buyers have low profitability
Quality of buyers output, or efficiency of buyers processes are unaffected by
quality of the product being bought
Buyer exerts significant influence over what end customer buys (e.g. distributor)
Factors that influence the intensity of competitive rivalry: The number of direct rivals
Depends on barriers to imitation .... discuss under sustainability of advantage
The basis on which competition occurs between rivals (e.g. price, features etc.)
Are there structural characteristics of the industry which encourage strong rivalry?
What determines the Intensity of Rivalry from Direct Competitors?
INTENSITY TENDS TO BE HIGH IF:
Many competitors
Little difference between competitors in terms of competitive advantage
No industry leader
Slow growth
High exit barriers
Strong reasons to fight (managerial aspirations, social goals)
Inability to read or respond to market signaling
Price is major basis of competition
Low product differentiation
High fixed costs
Large increments of capacity
Product is perishable
Strategy analysis: Given a strategy, what profitability are we likely to achieve?
SUSTAINABILITY OF ADVANTAGE

Full set of threats to sustainability (of a competitive advantage)

Imitation:
o In most businesses, sooner or later, imitators arrive:
Our value creation advantage (relative to imitators) decreases
Increasing direct competition
o Good strategies build barriers against imitation. Two lines of defence against imitators:
- Barriers which stop/discourage would-be imitators COPYING OUR STRATEGY (i.e. our set of
strategic choices) If competitor does manage to COPY our choices ....
- Barriers which stop/discourage would-be imitators MATCHING OUR COMPETITIVE POSITION (i.e.
our CV and our SC)
Barriers to Copying a Pioneers Strategy Choices:
1. Potential competitor cant copy our choices
a. Formal barriers to copying Unique resources + legal barriers
b. Potential competitor doesnt know how to copy. Secrecy, complexity
2. Its not worth potential competitor trying to copy
o Prospect of poor profitability
E.g. Pioneer has pre-empted a market niche
E.g. Pioneer has very strong brand
o Organizationally hard because of conflicts with other business(es) Conflicts often involve
brand, organizational culture

Barriers to Matching Pioneers Competitive Position:

o Assume would-be imitator succeeds in copying pioneers choices
o Pioneer may still enjoy sustainable advantage if it would take a long time for the imitator to match the
pioneers competitive position (e.g. CV, SC) because:
I. Follower finds it hard or time consuming to match Pioneers superior resources o E.g.
technology, capabilities, brand, org culture, relationships etc
II. Follower finds it hard to match Pioneers superior volume (market share) because of o
Significant economies of scale, significant experience/learning effects, significant switching
costs, significant network effects etc.
III. Follower finds it hard to match Pioneers scope of business activity
Whats the strategic significance of having a unit cost advantage? (assuming a commodity product i.e. no
difference in Customer Value)
Assume 3 competitors (A, B, C) in a scale sensitive, commodity product industry
Valuable resources
What do we mean by Resources?
o Think of Resources as stocks (assets) which enable you to carry out a business Akin to a
balance sheet item ... something you have when you stop the clock
o As opposed to activities which are flows Akin to a P&L Account item
o Bath tub analogy

Useful to recognise five main types of resources (=assets):

1) Financial assets (e.g. cash, investments)
2) Physical assets (plant & equipment etc.)
3) Human assets (e.g. people who work at the Firm)
4) Intangible assets (e.g. technology/knowhow, brand, organizational culture, relationships)
5) Capabilities (i.e. capability to carry out an activity e.g. capability to be innovative, capability to deliver
very high service level)
Some strategists also think of volume (or market share) as an intangible asset. I prefer to list scale
and scope effects separately
Strategists talk about valuable resources: What makes a resource valuable?
1) Significant impact on Customer Value or Supplier Cost
2) Competitively superior
3) Appropriable (i.e. can capture associated value)
4) Durable (i.e. its value lasts)
5) Not easily imitated
6) Not easily substituted Implies that resource is rare and not easily available to buy
Remember CarMax? What valuable resources did they develop over time?
Different kinds of Resources:
- Resources you can go and buy fairly easily (Purchased resources)
o Physical assets
o Human assets (people)
o Financial assets also best fits here
- Resources you need to invest in and develop over time (cant easily buy) (Manufactured resources)
Intangible assets
o Brand name
o Relationships
o Corporate culture
o Intellectual property Disney Characters
Organisational capabilities e.g.
o Speed of product development
o Creativity
o Design
- In general, Manufactured resources offer greater potential to be VALUABLE but not always...
 Strategic significance of different kinds of resources:

Valuable Resources play an important role in both Business Strategy and Corporate Strategy:
Business Strategy
o Valuable resources both help to create a competitive advantage
Underpin a superior CV SC gap
o And to make it more sustainable
Hard for competitors to copy and /or match our resource
o Corporate Strategy
Valuable resources can provide a basis for successful diversification
- If we can fairly easily transfer the resource to the new business

Coming up with ideas