Strategy Management 1-5
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Envisioning Strategy Business Models Visualized (created for and by students)
© Sunil Mehrotra
Strategic Management Process •
• •
•
Envisioning Strategy – Definition – Framework – Visual Models External Analysis – PEST – PEST Impact Analysis Industry Analysis – Industry Structure – Evolution of Industries – Industry Supply Chain – Potential Industry Earnings – Porter’s 5 Forces Analysis – Competitive Intensity – Strategies for minimizing competitive forces – Perceptual Map – Barriers to Entry/Incumbency advantages – DSIR effect Company Internal Analysis – Value Creating Processes – Core Competencies – Growth Strategies – SWOT Analysis – Mckinsey 7-S Framework – Change Management – Risk Assessment – Balanced Scorecard – GE Mckinsey Matrix
Envisioning Strategy: Visual Models 3 1
2 5
4 1. 2. 3. 4. 5. 6.
Visualize Think Clearly Communicate Effectively Understand Deeply Share the Vision Act Coherently
www.idiagram.com
Visual Model A Business Ecosystem The The environment environment Governments Governments Standards Standards bodies bodies New New entrants entrants Competitors Competitors Supplier’ ’s suppliers Supplier Supplier’s suppliers
Suppliers Suppliers
Organisation Organisation
Customers Customers
Customer’ ’s customers Customer Customer’s customers
Substitutes Substitutes
Stakeholders Stakeholders International International law law New Paradigm Consulting
Visual Model Comprehensive View
Strategic Management • Is the process by which an organization – Establishes its goals and objectives both short and long-term – Formulates plans and charts a course of action for meeting these goals and objectives in the desired time-frame. – Implements the actions – And analyzes progress and results
Strategic Management • Deals with – – – – – –
How to grow the business How to satisfy customers How to compete with rivals How to respond to changing environment How to manage each functional piece of the business How to build organizational capabilities and align organization to achieve desired goals – How to achieve strategic and financial objectives
Mission, Vision and Values • Vision articulates a view of a realistic, credible, attractive future for the organization…it is the all-important bridge from the present to the future of the organization. • Mission describes the purpose of the organization. It represents the present. • Values reflect the organization’s culture and norms of corporate behavior.
Goal, Scope and Objectives • Goal articulates a desired outcome for the business over a specific time period • Scope describes the focus of the business– geography, product lines and customer segments. • Objectives are the measurable and tangible results to be achieved over a specified time period
Strategic Planning • Planning is not about predicting the future • Planning is not about writing a detailed road map into the future • Planning is not about a few people writing a vision statement & then getting ‘buy-in’ from everyone else
Strategic Planning • Planning is about learning • Planning is about increasing the possibilities for the organisation • Planning is about discovering how fit the organisation is for its environment • Planning is about discovering and telling compelling stories about the future
Strategic Planning Framework External Factors
Analyzing the Environment
Analyzing the Industry
Internal Factors
Analyzing the Competition
Market Opportunities
Analyzing the firm’s Strengths & Weaknesses
Matching Market Opportunities to firm’s resources and capabilities
Analyzing the firm’s Architecture, Routines & Culture
Firm’s Resources & Capabilities
•What strategic options does the firm realistically have? •What is the best strategy for maximizing Shareholder value?
Shareholder Returns
Strategic Planning Framework External Factors Market Economics And Opportunities
Analyzing the Environment
•Direct Competition from Rivals •Bargaining Power of Suppliers •Bargaining Power of Customers •Threat from new entrants •Competition from Substitutes
Analyzing the Industry
Internal Factors
Market Attractiveness
Cost Position in Served Market Benefit Position in Served Market
Analyzing the Competition
Market Opportunities
Analyzing the firm’s Strengths & Weaknesses
Matching Market Opportunities to firm’s resources and capabilities
Analyzing the firm’s Architecture, Routines & Culture
Firm’s Resources & Capabilities
•What strategic options does the firm realistically have? •What is the best strategy for maximizing Shareholder value?
•Profit •Sales •Market Share •ROI •Market Value
Competitive Advantage Or Disadvantage
Shareholder Returns
Strategic Analysis Framework External Factors •Week 3 •Week 4 •Week 5
•Week 1 •Week 2
Analyzing the Environment
Analyzing the Industry
Internal Factors
• Week 6 • Week 7
•Week 8 •Week 9 •Week 10
Analyzing the Competition
Market Opportunities
Analyzing the firm’s Strengths & Weaknesses
Matching Market Opportunities to firm’s resources and capabilities •What strategic options does the firm realistically have? •What is the best strategy for maximizing Shareholder value?
•Profit •Sales •Market Share •ROI •Market Value
•Week 11 •Week 12
Analyzing the firm’s Architecture, Routines & Culture
Firm’s Resources & Capabilities
•Week 13 •Week 14
Shareholder Returns
Three Tests of Best Strategy Future: To here
The Goodness of Fit Test
The Competitive Advantage Test
The Performance Test
• A good strategy has to be well matched to Industry and competitive conditions, market opportunities and threats, and other aspects of a firm’s external environment • At the same time, it has to be tailored to the company’s resource and strengths and competitive capabilities •A good strategy leads to sustainable competitive advantage •The bigger the competitive edge the strategy helps build the more powerful and effective it is
•A good strategy boosts company performance -Gains in profitability -Gains In competitive strength and long-term market position
Present : From here
www.studymarketing.org
16
DEFINITION
Strategy (n) – An integrated set of actions designed to achieve a sustainable competitive advantage
2
17
PURPOSE OF STRATEGY •
Focus execution efforts •
•
Make choices • • •
•
Always requires good execution
Investments Acquisitions People
Create value
WHAT ARE THE COMPONENTS OF A STRATEGY? 18
•
Mission
•
Goals
•
Where to compete/grow
–
Customers/geographies
•
What to offer
–
Products/services
•
How to win vs competition
•
Actions and initiatives required
WHAT MAKES FOR A GOOD STRATEGY? 19
•
Clear and compelling
•
Integrated and complete
•
Grounded in facts
•
Clear short and long term priorities
•
Identification of specific actions and resources required
20
AGENDA •
What is strategy?
• What is Lulu’s strategy? •
How do we make it better?
•
•
Mission:
Target Markets:
•
Offerings:
•
By 2011: over $2B valuation + Gross margin 50%+ #1 in our business
Goals:
•
•
Establish the marketplace for digital content where authors make money from their written works
Global unserved and underserved profit-motivated book creators, Licensed/tier-one rights holders
Book creation and publishing tools and services, Social Network marketing and commerce, Ebook tools, Marketplace for any content “Free” business model Most $ to authors Engaged reader-writer community, Open Marketplace Reader device ubiquity, Global reach
Differentiator:
Actions and initiatives:
• • • •
International expansion Social Network integration (weRead) 3rd party book marketplace eBook wizard
5. 6. 7. 8.
Share financial success with those who create it Make Lulu platform an ecosystem Mobile cart and customer acquisition Increase licensed content partnerships
Strategy and Performance: “There are three kinds of companies— those that make things happen, those that watch things happen, and those that wonder what happened.” Anonymous .
Envisioning Strategy Business Models Visualized (created for and by students)
© Sunil Mehrotra
Strategic Management Process •
• •
•
Envisioning Strategy – Definition – Framework – Visual Models External Analysis – PEST – PEST Impact Analysis Industry Analysis – Industry Structure – Evolution of Industries – Industry Supply Chain – Potential Industry Earnings – Porter’s 5 Forces Analysis – Competitive Intensity – Strategies for minimizing competitive forces – Perceptual Map – Barriers to Entry/Incumbency advantages – DSIR effect Company Internal Analysis – Value Creating Processes – Core Competencies – Growth Strategies – SWOT Analysis – Mckinsey 7-S Framework – Change Management – Risk Assessment – Balanced Scorecard – GE Mckinsey Matrix
© Sunil Mehrotra
PEST Analysis Fiscal Policy Monetary Policy Tax laws Intellectual Property protection Copyright laws Poli Securities Laws tica Business climate l
Cha ng
ic m no ge o Ec han C
e
GDP GDP growth Exchange rate Unemployment rate Skilled labor Education levels Trade unions Infrastructure Healthcare costs Raw materials
Opportunities Opportunities
al New technologies c i Materials technologies log e o Process technologies hn ang c Information technologies Te Ch Communication technologies Government incentives Energy costs Broadband penetration Technology incubation
Threats Threats So c Ch ial ang e
Demographics Income Distribution Social stability Ethnic patterns Consumerism Discretionary income Fashions/fads Consumer trends
© Sunil Mehrotra
It is crucial to describe the subject for the PEST analysis clearly so that people, contributing to the analysis, and those interpreting the results from PEST analysis, could understand the purpose of the PEST assessment and its implications
PEST Impact Matrix Nature of change
Impact of change
Opportunities
Threats Threats
Strategic response
Political Change Economic Change Social Change Technological Change © Sunil Mehrotra
PEST Impact example: Nature of change
Impact of change
Opportunities
Threats Threats
Strategic response
Political Change Economic Change Social Change Technological Change © Sunil Mehrotra
PEST Analysis Example: Poli tica
l Ch ang
e
Emerging Markets
Infrastructure Technologies
ic m no ge o Ec han C
Digital Connections
Originations
Opportunities Opportunities Environmental Solutions
al c i g o l o hn ange c Te Ch
Demographics
So c Ch ial ang e © Sunil Mehrotra
PEST Impact example: Nature of change
Impact of change
Opportunities
Threats Threats
Strategic response
Political Change Economic Change Social Change Technological Change © Sunil Mehrotra
PEST Impact example: Demographics
© Sunil Mehrotra
PEST Impact example:
© Sunil Mehrotra
Scenario Planning
http://strategicframing.com/strategic-planning-workshop/
Contemplating the Future
Student Examples: Pest Analysis Breanne Hayes April 2008 MBA Graziadio School of Business and Management Pepperdine University
Elizabeth Passeretti April 2008 MBA Candidate Graziadio School of Business and Management Pepperdine University
PEST Analysis Impact on J&J
Political Change – The FDA must approve new products before they can be sold in the market, adding to the costly time-lag within the product pipeline.
high
Economic Change – Demand for many consumer health products is inelastic as changes in price do not tend to affect sales (consumer health products are used on a daily basis). In times of economic uncertainty, however, it is less likely that consumers will experiment with new product offerings
medium
Breanne Hayes, April 2008 MBA, Graziadio School of Business and Management Pepperdine University
PEST Analysis Social Change – Increased consumer awareness regarding health issues in recent years has contributed to increased spending on health related products. Increased health awareness is what will drive J&J’s expansion into global markets
Impact on J&J high
Technological Change – The consumer health industry is marked by rapid advances in scientific knowledge. Product offerings are subject to constant improvements in chemistry and industrial technology that allow scientists and engineers to create new products and modify existing ones
high
Breanne Hayes, April 2008 MBA, Graziadio School of Business and Management Pepperdine University
PEST example: Nature of change
Political Change Economic Change Social Change Technological Change
Impact of change
Opportunities
More FDA approval process conservative
US economic downturn
Aging Population
New materials for joint replacement
Longer time to market
Generic drugs more accepted
Consumer spending down Caring for the elderly
New cost/quality frontier
Threats Threats
Shorten Product Development Cycle Evaluate acquisitions Identify product/market needs to serve the elderly
New growth opportunities
New products
Strategic response
Potential new competitors
Invest in promising start-ups
© Sunil Mehrotra
Political Change Economic Change
Biotech firms are highly sensitive to changes in political power. A Liberal political party will likely reform healthcare so that the government bears more of the costs. The upcoming elections will have a significant impact on the industry. In addition, the industry if highly regulated by government agencies such as the FDA.
Impact
High
As most of the costs of drugs are subsidized by third-party payers (Medicare, Health Insurance), people will continue to purchase drugs even in an economic downturn. In addition, many of these drugs are taken out of necessity, not choice so demand is inelastic. However, third-party payers certainly feel the pain of an economic downturn and may impose cost cutting measures which reduce patient reimbursement and put more of an economic burden on patients. And Biotech firms often depend on single-source suppliers for raw materials and are therefore sensitive to increasing costs.
Medium
Elizabeth Passeretti April 2008 MBA Candidate Graziadio School of Business and Management,Pepperdine University
Technological Change
Social Change
Impact The aging population greatly increases the patient population which is beneficial for Biotech firms. The unfortunate reality is that more people are suffering from serious illness and need life saving therapeutics.
As evident by the very name of the industry, Biotech firms are highly influenced by advances in technology. Technology can greatly improve the likelihood of discovering new treatments as well as improving the manufacturing process.
High
High
Elizabeth Passeretti April 2008 MBA Candidate Graziadio School of Business and Management,Pepperdine University
PEST Impact example: Nature of change
Political Change Economic Change Social Change Technological Change
Impact of change
Opportunities
Democratic party More in power government control $100+ crude oil price
Aging Population Breakthrough in science. Process improvement technologies
Commodity prices increasing Caring for the elderly
New growth opportunities
New science and new technologies imminent
New startups. Disruptive technologies
Threats Threats
Strategic response
Pressure on prices
Operational Efficiency to reduce costs
Pressure on costs
Focus on Operational Efficiency Identify product/market needs to serve the elderly
Potential new competitors
Invest in/acquire promising start-ups
© Sunil Mehrotra
Envisioning Strategy Business Models Visualized (created for and by students)
© Sunil Mehrotra
Strategic Management Process •
• •
•
Envisioning Strategy – Definition – Framework – Visual Models External Analysis – PEST – PEST Impact Analysis Industry Analysis – Industry Structure – Evolution of Industries – Industry Supply Chain – Potential Industry Earnings – Porter’s 5 Forces Analysis – Competitive Intensity – Strategies for minimizing competitive forces – Perceptual Map – Barriers to Entry/Incumbency advantages – DSIR effect Company Internal Analysis – Value Creating Processes – Core Competencies – Growth Strategies – SWOT Analysis – Mckinsey 7-S Framework – Change Management – Risk Assessment – Balanced Scorecard – GE Mckinsey Matrix
© Sunil Mehrotra
Industry Analysis Understand Deeply
Suppliers
Competitors
Customers
Industry Analysis •Porter’s 5 Forces Analysis •Competitive Intensity •Strategies for minimizing competitive forces •Incumbency advantages •Value Chain •Potential Industry Earnings •Evolution of Industries •DSIR effects
© Sunil Mehrotra
Low
Spectrum of Competition Competitive Intensity
High
Perfect Competition Niche Market •Product Differentiation •Localized competition •Few Firms Clothing Stores •Strategic Interdependence Gas Stations •Profitability determined by behavior
Oligopoly
•Many firms •No product differentiation •Price based competition Commodities
Dominant Firm
Monopoly Single Firm Utilities
•Few large firms •More small firms •Pricing leadership •Protected Niches
Automobiles Commercial Aircrafts
Computer OS
Industry Profitability Adapted from: Saloner, Shepard, & Podolny: Strategic Management, Wiley and Sons, 2001
© Sunil Mehrotra
Industry Evolution: Traditional View Introduction
Growth
Maturity
Decline
Revenue
Operating Income
Losses Few competitors
Increasing sales and profits
Saturation
New competitors appear
Declining profits
Displaced by substitute products Profitability falls
Standardized features
Only a few large scale players survive
Industry shakeout
Most industries evolve towards © Sunil Mehrotra Adapted from: http://faculty.msb.edu/homak/HomaHelpSite/WebHelp/HomaHelp.htm
Oligopoly •Few Firms •Strategic Interdependence •Profitability determined by behavior of incumbents
The New View: The Cycle of Industry Creative Destruction 1
Mature/Vertically Integrated Three major phases of industry evolution “Cycle time” of evolution is driven by the pace and magnitude of marketplace discontinuities
3 Recombinant Market Leaders
2
Cycle-driving discontinuities include deregulation, technology, shifts in consumer preferences, globalization of markets, etc.
Focused New Entrants http://www.manyworlds.com/
The New View: The Cycle of Industry Creative Destruction Sales and Distribution
Superstores
Application Software
Word
Operating System
Windows
Computer
IBM
Direct
Retail
Wordperfect Others
HP
Apple
Apple
Linux
Dell
Chips
INTEL IBM
DEC
Sperry Univac
AMD
Wang
The “mature” Computer Industry Adapted from: Saloner, Shepard, & Podolny: Strategic Management, Wiley and Sons, 2001
The “recombinant” Computer Industry
Industry Supply/Value Chain Suppliers
Manufacturers
Distributors
Retailers
Consumers © Sunil Mehrotra
Student Examples: Supply Chain Breanne Hayes April 2008 MBA Graziadio School of Business and Management Pepperdine University
Elizabeth Passeretti April 2008 MBA Graziadio School of Business and Management Pepperdine University
Overview of Industry Value Chain: Consumer Health Products Cotton, Plastics, Chemicals, etc.
Incumbent Firms engage in R&D and Mfg to produce consumer health products and OTC pharmaceuticals
NOTE: Incumbent firms compete fiercely for retailer shelf space!
Market size: $480B Wholesalers
Retailers: Pharmacies, Drug Stores, Supermarkets
Consumers Breanne Hayes, April 2008 MBA, Graziadio School of Business and Management Pepperdine University
Industry Analysis
Legend Value = Product Value = Knowledge Regulators/Gatekeepers
Industry Supply Chain Raw materials, Lab equipment, Chemicals
Biotech Companies
$52 billion market
FDA Drug Wholesalers (61%)
Physicians (Customers) Payers (Insurance)
$67 billion market
Hospitals / Pharmacies (39%)
Patients (Consumers) Elizabeth Passeretti April 2008 MBA Candidate Graziadio School of Business and Management,Pepperdine University
Supply Chain: Value Added Profit
Value Added
PRICE
Value Added
Value Added
Consumers
Retailers
Distributors
Manufacturers
Suppliers
Material cosls
© Sunil Mehrotra
Consumers
Retailers
Distributors
Manufacturers
Suppliers
Value Added Template
Value Added
Profitability Asset Intensity ROI
Adapted from: http://faculty.msb.edu/homak/HomaHelpSite/WebHelp/HomaHelp.htm
Potential Industry Earnings (PIE) Analysis Factors effecting demand: •Customer habits •Customer expenditures •Number of substitutes •Number of complementary products •Price reduction by incumbents Industry Demand
Factors effecting costs
PIE
•Cost reductions by suppliers •Cost reductions by incumbents •Process improvements •Technology advances Opportunity Cost of Resources
Quantity Produced by the Industry
Adapted from: Saloner, Shepard, & Podolny: Strategic Management, Wiley and Sons, 2001
PIE Analysis Price
J&J is in a position to capture more potential industry earnings as a result of increased consumer demand
Demand shifting outward
Cost to J&J
Quantity
Breanne Hayes, April 2008 MBA, Graziadio School of Business and Management Pepperdine University
Porter’s 5 Forces Impact on PIE • •Intensity of Competition •Availability of Substitutes •Threat of new entrants •Bargaining power of Buyers
Industry Demand
Porter’s insight recognizes that the following characteristics are important to profitability of the incumbent: – The intensity of competition – The ability of suppliers or buyers of industry products to restrain industry profits – The behavior of firms producing closely related goods not included in the industry – Potential for entry into the market by new firms
PIE •Bargaining Power of Suppliers
Quantity Produced by the Industry
Adapted from: Saloner, Shepard, & Podolny: Strategic Management, Wiley and Sons, 2001
Opportunity Cost of Resources
Porter’s 5 Forces Framework Concentration of buyers Incumbents are fragmented Product is undifferentiated Switching to another supplier is simple Product is not strategic to the customer Customers can produce the product themselves Customer knows the production costs Customers can integrate back-words
Economies of scale High initial investments and fixed costs Learning economies Depreciated assets Brand loyalty Protected intellectual property Scarcity of qualified resources Access to raw material controlled by existing players Distribution channels controlled by existing players Existing players have close customer relations
Better prices Better performance Similar functionality
Few large suppliers No substitutes Customers are fragmented Switching costs to another supplier are high Supplier integrating forward Economies of scale Downstream more profitable Low barriers to entry downstream
Many small players High cost to exit Undifferentiated products Compete on price Low brand loyalty Low switching costs Slow/no growth market
www.themanager.org © Sunil Mehrotra
Impact on Profitability Threat/Power
High
Industry A
Moderate
Industry B
Low
Competitive Intensity Bargaining power of Suppliers Bargaining power of Customers Threat of New Entrants
Threat from Substitutes
Profits
© Sunil Mehrotra
Student Examples: Porter’s 5 Forces Analysis Breanne Hayes April 2008 MBA Graziadio School of Business and Management Pepperdine University
Nicholas Merriam April 2008 MBA Graziadio School of Business and Management Pepperdine University
Matt Kemp April 2008 MBA Graziadio School of Business and Management Pepperdine University
Thomas Weisel Partners
Porters 5 Forces:
• Coffee Growers • Pastry makers
Consumers
• Coffee machine makers
• Teas • Juices • Regular coffee
Nicholas Merriam, April 2008 MBA, Graziadio School of Business and Management Pepperdine University
Porter’s 5 Forces: Similarity of products enables easy switching
MODERATE
Barriers to entry: Small firms generally specialize in R&D and cannot realize manufacturing efficiencies that large incumbents benefit from
WEAK
MODERATE INTENSE Generic products capture value from consumers who are not willing to pay a premium for brand name products
INTENSE Breanne Hayes, April 2008 MBA, Graziadio School of Business and Management Pepperdine University
Porter’s 5 Forces: Customer’s Customer’s Power Power
MODERATE
Companies Companies are are able able to to choose choose who who they they partner partner with, with, but but are are limited limited by by their their ability ability to to run run aa business business and and shop shop aa deal deal to to investors. investors.
Thomas Weisel Partners
Threat Threat of of New New Entry Entry Bulge Bulge Bracket Bracket Banks Banks encroaching encroaching into into Middle Middle Market Market
High
MODERATE WEAK Supplier’s Supplier’s Power Power Investors Investors have have power power to to choose where they choose where they place place there there money, money, but but don’t don’t have have ability to organize ability to organize or or know know of of new new opportunities. opportunities.
Competitive Competitive Intensity Intensity
INTENSE
Industry Industry isis highly highly competitive Mathew Kemp, April 2008 MBA, competitive Graziadio School of Business and Management Pepperdine University
Impact on Profitability Threat/Power High
Moderate
Low
Competitive Intensity Bargaining power of Suppliers Bargaining power of Customers Threat of New Entrants
Threat from Substitutes
Profits
© Sunil Mehrotra
Impact on Profitability Threat/Power High
Moderate
Low
Competitive Intensity Bargaining power of Suppliers Bargaining power of Customers Threat of New Entrants
Threat from Substitutes
Profits
© Sunil Mehrotra
Strategies for minimizing the power of competitive forces Reducing the Bargaining Power of Customers Partnering Increase loyalty Increase incentives and value added Increase switching costs Cut out intermediaries
Reducing the threat of New Entrants Increasing minimum efficient scales of operations Creating brand image/loyalty Protection of intellectual property Alliances with linked products/services Tie up with suppliers Tie up with distributors Retaliation tactics Cut out intermediaries
Reducing threat of substitutes Increase switching costs Form alliances Enter substitute market Accentuate differences
Reducing the Bargaining Power of Suppliers Partnering Supply Chain Management Increase mutual dependency Build knowledge of supplier costs/methods Take-over supplier
Reducing competitive rivalry within Differentiate your product Avoid price competition Reduce industry over capacity Focus on different customer segments
Adapted from: www.themanager.org
Porter’s 5 Forces and Generic Strategies Cost Leadership
Differentiation
Focus
Competitive Intensity
Better able to compete on price
Brand loyalty to keep customers from switching
Rivals cannot meet focused customer needs
Bargaining power of Suppliers
Better insulated from suppliers
Better able to pass on supplier price increases to customers
Better able to pass on supplier price increases to customers
Bargaining power of Customers
Better positioned to offer lower prices
Fewer alternatives available to switch to
Fewer alternatives available to switch to
Threat of New Entrants
Ability to deter new entrants by offering lower prices
Customer loyalty can deter new entrants
Specialization develops unique competencies difficult for new entrants to match
Can use lower prices to defend against substitutes
Customers less willing to accept substitutes
Customers less willing to switch to substitutes
Threat from Substitutes Examples:
www.studymarketing.org
Product Differentiation minimizes competitive intensity Perceptual Map of Automobile Brands
•
•
• •
Perceptual Maps are a visual display (usually on two dimensions) of how brands are perceived by customers. The closer the brands are positioned in this space the more competitive they are to each other. Perceptual Maps identify “open spaces” or unmet customer needs. Perceptual Maps identify salient attributes of the products on which consumers differentiate brands.
Adapted from: http://en.wikipedia.org/wiki/Perceptual_mapping
Perceptual Map of the Beer Market Heavy
Heavy
Full Bodied
•
Old Milwaukee
Budweiser
•
Meister Brau
•
Good Value
Popular with Men
Miller Blue Collar
•
Beck’s
•
•
Stroh’s
Budget
• Heineken
Special Occasions Coors
•
Dining Out
Premium
Premium
• Michelob •
On a Budget
•
Pale Color
Old Milwaukee Light
Light
Miller Lite Light
•
Coors Light
Popular with Women
Less Filling Adapted from: Prof. Ganesh Iyer, UC Berkeley
Perceptual Map of 2000 Presidential Candidates Leader
Colin Powell John McCain George W. Bush
Traditional Liberal
Religious Conservative
Bill Bradley Alan Keyes Elizabeth Dole Steve Forbes
Al Gore
Pat Buchanan Donald Trump Jesse Jackson
Republican Democrat Independent
Opportunistic Source: 12Americans.com, 2000 www.populus.com
Student Examples: Perceptual Mapping
Nina Tooley April 2008 MBA Graziadio School of Business and Management Pepperdine University
Perceptual Map Example: Contemporary
Zara
Discount
Expensive
Classic Nina Tooley, April 2008 MBA, Graziadio School of Business and Management Pepperdine University
Perceptual Map Example: Contemporary
Zara
Young
Mature
Classic Nina Tooley, April 2008 MBA, Graziadio School of Business and Management Pepperdine University
Barriers to Entry/ Incumbency Advantage • • • • • • • •
© Sunil Mehrotra
Economies of Scale Cumulative Investments Learning economies Innovation advantage Promotional advantage Customer loyalty advantage Switching costs advantage Demand Side increasing returns advantage
Adapted from: Saloner, Shepard, & Podolny: Strategic Management, Wiley and Sons, 2001
Economies of scale occur when increased output leads to lower unit costs (lower average costs) Wal-Mart can sell products more cheaply because its huge buying power gives it economies of scale.
© Sunil Mehrotra
Strategic Management Process •
• •
•
Envisioning Strategy – Definition – Framework – Visual Models External Analysis – PEST – PEST Impact Analysis Industry Analysis – Industry Structure – Evolution of Industries – Industry Supply Chain – Potential Industry Earnings – Porter’s 5 Forces Analysis – Competitive Intensity – Strategies for minimizing competitive forces – Perceptual Map – Barriers to Entry/Incumbency advantages – DSIR effect Company Internal Analysis – Value Creating Processes – Core Competencies – Growth Strategies – SWOT Analysis – Mckinsey 7-S Framework – Change Management – Risk Assessment – Balanced Scorecard – GE Mckinsey Matrix
Envisioning Strategy: Visual Models 3 1
2 5
4 1. 2. 3. 4. 5. 6.
Visualize Think Clearly Communicate Effectively Understand Deeply Share the Vision Act Coherently
www.idiagram.com
Visual Model A Business Ecosystem The The environment environment Governments Governments Standards Standards bodies bodies New New entrants entrants Competitors Competitors Supplier’ ’s suppliers Supplier Supplier’s suppliers
Suppliers Suppliers
Organisation Organisation
Customers Customers
Customer’ ’s customers Customer Customer’s customers
Substitutes Substitutes
Stakeholders Stakeholders International International law law New Paradigm Consulting
Visual Model Comprehensive View
Strategic Management • Is the process by which an organization – Establishes its goals and objectives both short and long-term – Formulates plans and charts a course of action for meeting these goals and objectives in the desired time-frame. – Implements the actions – And analyzes progress and results
Strategic Management • Deals with – – – – – –
How to grow the business How to satisfy customers How to compete with rivals How to respond to changing environment How to manage each functional piece of the business How to build organizational capabilities and align organization to achieve desired goals – How to achieve strategic and financial objectives
Mission, Vision and Values • Vision articulates a view of a realistic, credible, attractive future for the organization…it is the all-important bridge from the present to the future of the organization. • Mission describes the purpose of the organization. It represents the present. • Values reflect the organization’s culture and norms of corporate behavior.
Goal, Scope and Objectives • Goal articulates a desired outcome for the business over a specific time period • Scope describes the focus of the business– geography, product lines and customer segments. • Objectives are the measurable and tangible results to be achieved over a specified time period
Strategic Planning • Planning is not about predicting the future • Planning is not about writing a detailed road map into the future • Planning is not about a few people writing a vision statement & then getting ‘buy-in’ from everyone else
Strategic Planning • Planning is about learning • Planning is about increasing the possibilities for the organisation • Planning is about discovering how fit the organisation is for its environment • Planning is about discovering and telling compelling stories about the future
Strategic Planning Framework External Factors
Analyzing the Environment
Analyzing the Industry
Internal Factors
Analyzing the Competition
Market Opportunities
Analyzing the firm’s Strengths & Weaknesses
Matching Market Opportunities to firm’s resources and capabilities
Analyzing the firm’s Architecture, Routines & Culture
Firm’s Resources & Capabilities
•What strategic options does the firm realistically have? •What is the best strategy for maximizing Shareholder value?
Shareholder Returns
Strategic Planning Framework External Factors Market Economics And Opportunities
Analyzing the Environment
•Direct Competition from Rivals •Bargaining Power of Suppliers •Bargaining Power of Customers •Threat from new entrants •Competition from Substitutes
Analyzing the Industry
Internal Factors
Market Attractiveness
Cost Position in Served Market Benefit Position in Served Market
Analyzing the Competition
Market Opportunities
Analyzing the firm’s Strengths & Weaknesses
Matching Market Opportunities to firm’s resources and capabilities
Analyzing the firm’s Architecture, Routines & Culture
Firm’s Resources & Capabilities
•What strategic options does the firm realistically have? •What is the best strategy for maximizing Shareholder value?
•Profit •Sales •Market Share •ROI •Market Value
Competitive Advantage Or Disadvantage
Shareholder Returns
Strategic Analysis Framework External Factors •Week 3 •Week 4 •Week 5
•Week 1 •Week 2
Analyzing the Environment
Analyzing the Industry
Internal Factors
• Week 6 • Week 7
•Week 8 •Week 9 •Week 10
Analyzing the Competition
Market Opportunities
Analyzing the firm’s Strengths & Weaknesses
Matching Market Opportunities to firm’s resources and capabilities •What strategic options does the firm realistically have? •What is the best strategy for maximizing Shareholder value?
•Profit •Sales •Market Share •ROI •Market Value
•Week 11 •Week 12
Analyzing the firm’s Architecture, Routines & Culture
Firm’s Resources & Capabilities
•Week 13 •Week 14
Shareholder Returns
Three Tests of Best Strategy Future: To here
The Goodness of Fit Test
The Competitive Advantage Test
The Performance Test
• A good strategy has to be well matched to Industry and competitive conditions, market opportunities and threats, and other aspects of a firm’s external environment • At the same time, it has to be tailored to the company’s resource and strengths and competitive capabilities •A good strategy leads to sustainable competitive advantage •The bigger the competitive edge the strategy helps build the more powerful and effective it is
•A good strategy boosts company performance -Gains in profitability -Gains In competitive strength and long-term market position
Present : From here
www.studymarketing.org
16
DEFINITION
Strategy (n) – An integrated set of actions designed to achieve a sustainable competitive advantage
2
17
PURPOSE OF STRATEGY •
Focus execution efforts •
•
Make choices • • •
•
Always requires good execution
Investments Acquisitions People
Create value
WHAT ARE THE COMPONENTS OF A STRATEGY? 18
•
Mission
•
Goals
•
Where to compete/grow
–
Customers/geographies
•
What to offer
–
Products/services
•
How to win vs competition
•
Actions and initiatives required
WHAT MAKES FOR A GOOD STRATEGY? 19
•
Clear and compelling
•
Integrated and complete
•
Grounded in facts
•
Clear short and long term priorities
•
Identification of specific actions and resources required
20
AGENDA •
What is strategy?
• What is Lulu’s strategy? •
How do we make it better?
•
•
Mission:
Target Markets:
•
Offerings:
•
By 2011: over $2B valuation + Gross margin 50%+ #1 in our business
Goals:
•
•
Establish the marketplace for digital content where authors make money from their written works
Global unserved and underserved profit-motivated book creators, Licensed/tier-one rights holders
Book creation and publishing tools and services, Social Network marketing and commerce, Ebook tools, Marketplace for any content “Free” business model Most $ to authors Engaged reader-writer community, Open Marketplace Reader device ubiquity, Global reach
Differentiator:
Actions and initiatives:
• • • •
International expansion Social Network integration (weRead) 3rd party book marketplace eBook wizard
5. 6. 7. 8.
Share financial success with those who create it Make Lulu platform an ecosystem Mobile cart and customer acquisition Increase licensed content partnerships
Strategy and Performance: “There are three kinds of companies— those that make things happen, those that watch things happen, and those that wonder what happened.” Anonymous .
Envisioning Strategy Business Models Visualized (created for and by students)
© Sunil Mehrotra
Strategic Management Process •
• •
•
Envisioning Strategy – Definition – Framework – Visual Models External Analysis – PEST – PEST Impact Analysis Industry Analysis – Industry Structure – Evolution of Industries – Industry Supply Chain – Potential Industry Earnings – Porter’s 5 Forces Analysis – Competitive Intensity – Strategies for minimizing competitive forces – Perceptual Map – Barriers to Entry/Incumbency advantages – DSIR effect Company Internal Analysis – Value Creating Processes – Core Competencies – Growth Strategies – SWOT Analysis – Mckinsey 7-S Framework – Change Management – Risk Assessment – Balanced Scorecard – GE Mckinsey Matrix
© Sunil Mehrotra
PEST Analysis Fiscal Policy Monetary Policy Tax laws Intellectual Property protection Copyright laws Poli Securities Laws tica Business climate l
Cha ng
ic m no ge o Ec han C
e
GDP GDP growth Exchange rate Unemployment rate Skilled labor Education levels Trade unions Infrastructure Healthcare costs Raw materials
Opportunities Opportunities
al New technologies c i Materials technologies log e o Process technologies hn ang c Information technologies Te Ch Communication technologies Government incentives Energy costs Broadband penetration Technology incubation
Threats Threats So c Ch ial ang e
Demographics Income Distribution Social stability Ethnic patterns Consumerism Discretionary income Fashions/fads Consumer trends
© Sunil Mehrotra
It is crucial to describe the subject for the PEST analysis clearly so that people, contributing to the analysis, and those interpreting the results from PEST analysis, could understand the purpose of the PEST assessment and its implications
PEST Impact Matrix Nature of change
Impact of change
Opportunities
Threats Threats
Strategic response
Political Change Economic Change Social Change Technological Change © Sunil Mehrotra
PEST Impact example: Nature of change
Impact of change
Opportunities
Threats Threats
Strategic response
Political Change Economic Change Social Change Technological Change © Sunil Mehrotra
PEST Analysis Example: Poli tica
l Ch ang
e
Emerging Markets
Infrastructure Technologies
ic m no ge o Ec han C
Digital Connections
Originations
Opportunities Opportunities Environmental Solutions
al c i g o l o hn ange c Te Ch
Demographics
So c Ch ial ang e © Sunil Mehrotra
PEST Impact example: Nature of change
Impact of change
Opportunities
Threats Threats
Strategic response
Political Change Economic Change Social Change Technological Change © Sunil Mehrotra
PEST Impact example: Demographics
© Sunil Mehrotra
PEST Impact example:
© Sunil Mehrotra
Scenario Planning
http://strategicframing.com/strategic-planning-workshop/
Contemplating the Future
Student Examples: Pest Analysis Breanne Hayes April 2008 MBA Graziadio School of Business and Management Pepperdine University
Elizabeth Passeretti April 2008 MBA Candidate Graziadio School of Business and Management Pepperdine University
PEST Analysis Impact on J&J
Political Change – The FDA must approve new products before they can be sold in the market, adding to the costly time-lag within the product pipeline.
high
Economic Change – Demand for many consumer health products is inelastic as changes in price do not tend to affect sales (consumer health products are used on a daily basis). In times of economic uncertainty, however, it is less likely that consumers will experiment with new product offerings
medium
Breanne Hayes, April 2008 MBA, Graziadio School of Business and Management Pepperdine University
PEST Analysis Social Change – Increased consumer awareness regarding health issues in recent years has contributed to increased spending on health related products. Increased health awareness is what will drive J&J’s expansion into global markets
Impact on J&J high
Technological Change – The consumer health industry is marked by rapid advances in scientific knowledge. Product offerings are subject to constant improvements in chemistry and industrial technology that allow scientists and engineers to create new products and modify existing ones
high
Breanne Hayes, April 2008 MBA, Graziadio School of Business and Management Pepperdine University
PEST example: Nature of change
Political Change Economic Change Social Change Technological Change
Impact of change
Opportunities
More FDA approval process conservative
US economic downturn
Aging Population
New materials for joint replacement
Longer time to market
Generic drugs more accepted
Consumer spending down Caring for the elderly
New cost/quality frontier
Threats Threats
Shorten Product Development Cycle Evaluate acquisitions Identify product/market needs to serve the elderly
New growth opportunities
New products
Strategic response
Potential new competitors
Invest in promising start-ups
© Sunil Mehrotra
Political Change Economic Change
Biotech firms are highly sensitive to changes in political power. A Liberal political party will likely reform healthcare so that the government bears more of the costs. The upcoming elections will have a significant impact on the industry. In addition, the industry if highly regulated by government agencies such as the FDA.
Impact
High
As most of the costs of drugs are subsidized by third-party payers (Medicare, Health Insurance), people will continue to purchase drugs even in an economic downturn. In addition, many of these drugs are taken out of necessity, not choice so demand is inelastic. However, third-party payers certainly feel the pain of an economic downturn and may impose cost cutting measures which reduce patient reimbursement and put more of an economic burden on patients. And Biotech firms often depend on single-source suppliers for raw materials and are therefore sensitive to increasing costs.
Medium
Elizabeth Passeretti April 2008 MBA Candidate Graziadio School of Business and Management,Pepperdine University
Technological Change
Social Change
Impact The aging population greatly increases the patient population which is beneficial for Biotech firms. The unfortunate reality is that more people are suffering from serious illness and need life saving therapeutics.
As evident by the very name of the industry, Biotech firms are highly influenced by advances in technology. Technology can greatly improve the likelihood of discovering new treatments as well as improving the manufacturing process.
High
High
Elizabeth Passeretti April 2008 MBA Candidate Graziadio School of Business and Management,Pepperdine University
PEST Impact example: Nature of change
Political Change Economic Change Social Change Technological Change
Impact of change
Opportunities
Democratic party More in power government control $100+ crude oil price
Aging Population Breakthrough in science. Process improvement technologies
Commodity prices increasing Caring for the elderly
New growth opportunities
New science and new technologies imminent
New startups. Disruptive technologies
Threats Threats
Strategic response
Pressure on prices
Operational Efficiency to reduce costs
Pressure on costs
Focus on Operational Efficiency Identify product/market needs to serve the elderly
Potential new competitors
Invest in/acquire promising start-ups
© Sunil Mehrotra
Envisioning Strategy Business Models Visualized (created for and by students)
© Sunil Mehrotra
Strategic Management Process •
• •
•
Envisioning Strategy – Definition – Framework – Visual Models External Analysis – PEST – PEST Impact Analysis Industry Analysis – Industry Structure – Evolution of Industries – Industry Supply Chain – Potential Industry Earnings – Porter’s 5 Forces Analysis – Competitive Intensity – Strategies for minimizing competitive forces – Perceptual Map – Barriers to Entry/Incumbency advantages – DSIR effect Company Internal Analysis – Value Creating Processes – Core Competencies – Growth Strategies – SWOT Analysis – Mckinsey 7-S Framework – Change Management – Risk Assessment – Balanced Scorecard – GE Mckinsey Matrix
© Sunil Mehrotra
Industry Analysis Understand Deeply
Suppliers
Competitors
Customers
Industry Analysis •Porter’s 5 Forces Analysis •Competitive Intensity •Strategies for minimizing competitive forces •Incumbency advantages •Value Chain •Potential Industry Earnings •Evolution of Industries •DSIR effects
© Sunil Mehrotra
Low
Spectrum of Competition Competitive Intensity
High
Perfect Competition Niche Market •Product Differentiation •Localized competition •Few Firms Clothing Stores •Strategic Interdependence Gas Stations •Profitability determined by behavior
Oligopoly
•Many firms •No product differentiation •Price based competition Commodities
Dominant Firm
Monopoly Single Firm Utilities
•Few large firms •More small firms •Pricing leadership •Protected Niches
Automobiles Commercial Aircrafts
Computer OS
Industry Profitability Adapted from: Saloner, Shepard, & Podolny: Strategic Management, Wiley and Sons, 2001
© Sunil Mehrotra
Industry Evolution: Traditional View Introduction
Growth
Maturity
Decline
Revenue
Operating Income
Losses Few competitors
Increasing sales and profits
Saturation
New competitors appear
Declining profits
Displaced by substitute products Profitability falls
Standardized features
Only a few large scale players survive
Industry shakeout
Most industries evolve towards © Sunil Mehrotra Adapted from: http://faculty.msb.edu/homak/HomaHelpSite/WebHelp/HomaHelp.htm
Oligopoly •Few Firms •Strategic Interdependence •Profitability determined by behavior of incumbents
The New View: The Cycle of Industry Creative Destruction 1
Mature/Vertically Integrated Three major phases of industry evolution “Cycle time” of evolution is driven by the pace and magnitude of marketplace discontinuities
3 Recombinant Market Leaders
2
Cycle-driving discontinuities include deregulation, technology, shifts in consumer preferences, globalization of markets, etc.
Focused New Entrants http://www.manyworlds.com/
The New View: The Cycle of Industry Creative Destruction Sales and Distribution
Superstores
Application Software
Word
Operating System
Windows
Computer
IBM
Direct
Retail
Wordperfect Others
HP
Apple
Apple
Linux
Dell
Chips
INTEL IBM
DEC
Sperry Univac
AMD
Wang
The “mature” Computer Industry Adapted from: Saloner, Shepard, & Podolny: Strategic Management, Wiley and Sons, 2001
The “recombinant” Computer Industry
Industry Supply/Value Chain Suppliers
Manufacturers
Distributors
Retailers
Consumers © Sunil Mehrotra
Student Examples: Supply Chain Breanne Hayes April 2008 MBA Graziadio School of Business and Management Pepperdine University
Elizabeth Passeretti April 2008 MBA Graziadio School of Business and Management Pepperdine University
Overview of Industry Value Chain: Consumer Health Products Cotton, Plastics, Chemicals, etc.
Incumbent Firms engage in R&D and Mfg to produce consumer health products and OTC pharmaceuticals
NOTE: Incumbent firms compete fiercely for retailer shelf space!
Market size: $480B Wholesalers
Retailers: Pharmacies, Drug Stores, Supermarkets
Consumers Breanne Hayes, April 2008 MBA, Graziadio School of Business and Management Pepperdine University
Industry Analysis
Legend Value = Product Value = Knowledge Regulators/Gatekeepers
Industry Supply Chain Raw materials, Lab equipment, Chemicals
Biotech Companies
$52 billion market
FDA Drug Wholesalers (61%)
Physicians (Customers) Payers (Insurance)
$67 billion market
Hospitals / Pharmacies (39%)
Patients (Consumers) Elizabeth Passeretti April 2008 MBA Candidate Graziadio School of Business and Management,Pepperdine University
Supply Chain: Value Added Profit
Value Added
PRICE
Value Added
Value Added
Consumers
Retailers
Distributors
Manufacturers
Suppliers
Material cosls
© Sunil Mehrotra
Consumers
Retailers
Distributors
Manufacturers
Suppliers
Value Added Template
Value Added
Profitability Asset Intensity ROI
Adapted from: http://faculty.msb.edu/homak/HomaHelpSite/WebHelp/HomaHelp.htm
Potential Industry Earnings (PIE) Analysis Factors effecting demand: •Customer habits •Customer expenditures •Number of substitutes •Number of complementary products •Price reduction by incumbents Industry Demand
Factors effecting costs
PIE
•Cost reductions by suppliers •Cost reductions by incumbents •Process improvements •Technology advances Opportunity Cost of Resources
Quantity Produced by the Industry
Adapted from: Saloner, Shepard, & Podolny: Strategic Management, Wiley and Sons, 2001
PIE Analysis Price
J&J is in a position to capture more potential industry earnings as a result of increased consumer demand
Demand shifting outward
Cost to J&J
Quantity
Breanne Hayes, April 2008 MBA, Graziadio School of Business and Management Pepperdine University
Porter’s 5 Forces Impact on PIE • •Intensity of Competition •Availability of Substitutes •Threat of new entrants •Bargaining power of Buyers
Industry Demand
Porter’s insight recognizes that the following characteristics are important to profitability of the incumbent: – The intensity of competition – The ability of suppliers or buyers of industry products to restrain industry profits – The behavior of firms producing closely related goods not included in the industry – Potential for entry into the market by new firms
PIE •Bargaining Power of Suppliers
Quantity Produced by the Industry
Adapted from: Saloner, Shepard, & Podolny: Strategic Management, Wiley and Sons, 2001
Opportunity Cost of Resources
Porter’s 5 Forces Framework Concentration of buyers Incumbents are fragmented Product is undifferentiated Switching to another supplier is simple Product is not strategic to the customer Customers can produce the product themselves Customer knows the production costs Customers can integrate back-words
Economies of scale High initial investments and fixed costs Learning economies Depreciated assets Brand loyalty Protected intellectual property Scarcity of qualified resources Access to raw material controlled by existing players Distribution channels controlled by existing players Existing players have close customer relations
Better prices Better performance Similar functionality
Few large suppliers No substitutes Customers are fragmented Switching costs to another supplier are high Supplier integrating forward Economies of scale Downstream more profitable Low barriers to entry downstream
Many small players High cost to exit Undifferentiated products Compete on price Low brand loyalty Low switching costs Slow/no growth market
www.themanager.org © Sunil Mehrotra
Impact on Profitability Threat/Power
High
Industry A
Moderate
Industry B
Low
Competitive Intensity Bargaining power of Suppliers Bargaining power of Customers Threat of New Entrants
Threat from Substitutes
Profits
© Sunil Mehrotra
Student Examples: Porter’s 5 Forces Analysis Breanne Hayes April 2008 MBA Graziadio School of Business and Management Pepperdine University
Nicholas Merriam April 2008 MBA Graziadio School of Business and Management Pepperdine University
Matt Kemp April 2008 MBA Graziadio School of Business and Management Pepperdine University
Thomas Weisel Partners
Porters 5 Forces:
• Coffee Growers • Pastry makers
Consumers
• Coffee machine makers
• Teas • Juices • Regular coffee
Nicholas Merriam, April 2008 MBA, Graziadio School of Business and Management Pepperdine University
Porter’s 5 Forces: Similarity of products enables easy switching
MODERATE
Barriers to entry: Small firms generally specialize in R&D and cannot realize manufacturing efficiencies that large incumbents benefit from
WEAK
MODERATE INTENSE Generic products capture value from consumers who are not willing to pay a premium for brand name products
INTENSE Breanne Hayes, April 2008 MBA, Graziadio School of Business and Management Pepperdine University
Porter’s 5 Forces: Customer’s Customer’s Power Power
MODERATE
Companies Companies are are able able to to choose choose who who they they partner partner with, with, but but are are limited limited by by their their ability ability to to run run aa business business and and shop shop aa deal deal to to investors. investors.
Thomas Weisel Partners
Threat Threat of of New New Entry Entry Bulge Bulge Bracket Bracket Banks Banks encroaching encroaching into into Middle Middle Market Market
High
MODERATE WEAK Supplier’s Supplier’s Power Power Investors Investors have have power power to to choose where they choose where they place place there there money, money, but but don’t don’t have have ability to organize ability to organize or or know know of of new new opportunities. opportunities.
Competitive Competitive Intensity Intensity
INTENSE
Industry Industry isis highly highly competitive Mathew Kemp, April 2008 MBA, competitive Graziadio School of Business and Management Pepperdine University
Impact on Profitability Threat/Power High
Moderate
Low
Competitive Intensity Bargaining power of Suppliers Bargaining power of Customers Threat of New Entrants
Threat from Substitutes
Profits
© Sunil Mehrotra
Impact on Profitability Threat/Power High
Moderate
Low
Competitive Intensity Bargaining power of Suppliers Bargaining power of Customers Threat of New Entrants
Threat from Substitutes
Profits
© Sunil Mehrotra
Strategies for minimizing the power of competitive forces Reducing the Bargaining Power of Customers Partnering Increase loyalty Increase incentives and value added Increase switching costs Cut out intermediaries
Reducing the threat of New Entrants Increasing minimum efficient scales of operations Creating brand image/loyalty Protection of intellectual property Alliances with linked products/services Tie up with suppliers Tie up with distributors Retaliation tactics Cut out intermediaries
Reducing threat of substitutes Increase switching costs Form alliances Enter substitute market Accentuate differences
Reducing the Bargaining Power of Suppliers Partnering Supply Chain Management Increase mutual dependency Build knowledge of supplier costs/methods Take-over supplier
Reducing competitive rivalry within Differentiate your product Avoid price competition Reduce industry over capacity Focus on different customer segments
Adapted from: www.themanager.org
Porter’s 5 Forces and Generic Strategies Cost Leadership
Differentiation
Focus
Competitive Intensity
Better able to compete on price
Brand loyalty to keep customers from switching
Rivals cannot meet focused customer needs
Bargaining power of Suppliers
Better insulated from suppliers
Better able to pass on supplier price increases to customers
Better able to pass on supplier price increases to customers
Bargaining power of Customers
Better positioned to offer lower prices
Fewer alternatives available to switch to
Fewer alternatives available to switch to
Threat of New Entrants
Ability to deter new entrants by offering lower prices
Customer loyalty can deter new entrants
Specialization develops unique competencies difficult for new entrants to match
Can use lower prices to defend against substitutes
Customers less willing to accept substitutes
Customers less willing to switch to substitutes
Threat from Substitutes Examples:
www.studymarketing.org
Product Differentiation minimizes competitive intensity Perceptual Map of Automobile Brands
•
•
• •
Perceptual Maps are a visual display (usually on two dimensions) of how brands are perceived by customers. The closer the brands are positioned in this space the more competitive they are to each other. Perceptual Maps identify “open spaces” or unmet customer needs. Perceptual Maps identify salient attributes of the products on which consumers differentiate brands.
Adapted from: http://en.wikipedia.org/wiki/Perceptual_mapping
Perceptual Map of the Beer Market Heavy
Heavy
Full Bodied
•
Old Milwaukee
Budweiser
•
Meister Brau
•
Good Value
Popular with Men
Miller Blue Collar
•
Beck’s
•
•
Stroh’s
Budget
• Heineken
Special Occasions Coors
•
Dining Out
Premium
Premium
• Michelob •
On a Budget
•
Pale Color
Old Milwaukee Light
Light
Miller Lite Light
•
Coors Light
Popular with Women
Less Filling Adapted from: Prof. Ganesh Iyer, UC Berkeley
Perceptual Map of 2000 Presidential Candidates Leader
Colin Powell John McCain George W. Bush
Traditional Liberal
Religious Conservative
Bill Bradley Alan Keyes Elizabeth Dole Steve Forbes
Al Gore
Pat Buchanan Donald Trump Jesse Jackson
Republican Democrat Independent
Opportunistic Source: 12Americans.com, 2000 www.populus.com
Student Examples: Perceptual Mapping
Nina Tooley April 2008 MBA Graziadio School of Business and Management Pepperdine University
Perceptual Map Example: Contemporary
Zara
Discount
Expensive
Classic Nina Tooley, April 2008 MBA, Graziadio School of Business and Management Pepperdine University
Perceptual Map Example: Contemporary
Zara
Young
Mature
Classic Nina Tooley, April 2008 MBA, Graziadio School of Business and Management Pepperdine University
Barriers to Entry/ Incumbency Advantage • • • • • • • •
© Sunil Mehrotra
Economies of Scale Cumulative Investments Learning economies Innovation advantage Promotional advantage Customer loyalty advantage Switching costs advantage Demand Side increasing returns advantage
Adapted from: Saloner, Shepard, & Podolny: Strategic Management, Wiley and Sons, 2001
Economies of scale occur when increased output leads to lower unit costs (lower average costs) Wal-Mart can sell products more cheaply because its huge buying power gives it economies of scale.
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