STRATEGIC MANAGEMENT

What is Strategy?

Strategy is a firm’s answer to 2 fundamental questions –

1. Where should we compete and
2. How should we compete

The purpose of strategy is to create ‘competitive advantage’ that generates superior, sustainable financial returns.

Requirements for doing this successfully–

1. The first is an understanding of the business landscape: the forces that shape competition, the dynamics
among players and the drivers of industry evolution. This informs where the firm chooses to engage with its
competition.
2. The second is the choice of a position on this landscape. The firm’s positioning shapes the choice of a business
model and the underlying set of activities that sustains it.
 What is Strategy?

Strategy as you can see consists of choices.

It is the integrated set of choices that positions the business in its industry so as to generate superior
financial returns over the long run.

A strategy can fail because –

u The firm has chosen a particularly difficult place on the business landscape and is not able to
adapt to, or change, its environment.
u The firm’s choices are not truly integrated and so its intended business model and positioning do
not fully align.

A SUCCESSFUL STRATEGY DEMONSTRATES CONSISTENCY

What is competitive advantage?

A firm’s ability to create a large gap between the amount its customers are willing to
pay and the costs it incurs. To create this advantage, a firm must perform activities
more effectively and distinctively than its industry rivals.
Concept of strategy

A business may have what it calls as –

u Marketing strategy
u Innovation strategy
u Technology strategy
u Implementing a balanced scorecard
u Strategic outsourcing
u Process re-engineering program
u Operational effectiveness & boosting productivity
u Cutting costs

Each of the above is a strategy in a general sense that they comprise a broad plan supported by underlying
actions.
Concept of strategy

Economies of scale: The decline in the cost of production per unit as the
volume grows.
Economies of scope: The decline in the cost of production due to sharing of
resources across products and services.
SWOT framework: A theory that matches a company’s strengths against its
weaknesses and its opportunities against its threats.

IT IS CRITICAL TO UNDERSTAND STRATEGY IN ITS ORIGINAL SENSE AS

‘COMPETITIVE STRATEGY’
Structural Forces

Ralph Waldo Emerson declared that “if a man make a better mousetrap than
his neighbour, the world will make a beaten path to his door”

Warren Buffet famously stated – “When an industry’s underlying economics

are crumbling , talented management may slow the rate of decline.
Eventually, though, eroding fundamentals will overwhelm managerial
brilliance.”
Threat of new entrants

New entrants in an industry can quickly erode profits by increasing competition,

introducing alternative products, and capturing market share.
New players are best able to make inroads when the incumbent players do not
benefit from -

u economies of scale
u a strong brand identity
u proprietary knowledge

In such environments, we say that there are low barriers to entry. Ex- Apps
Bargaining power of suppliers

If suppliers offer -
u a unique product
u have made it difficult to switch to other suppliers
u are more concentrated than the industry they serve

then they can raise the prices at which they supply the industry. A powerful supplier
group can drive up costs that industry players are unable to pass on to their
customers. Ex- Soft drinks
Bargaining power of buyers

Powerful customers can also affect industry profitability. An industry’s buyers are pow
erful if -
u they are concentrated
u are free to direct their purchases elsewhere

The U.S. retail industry has seen buyer power increasingly consolidated to Walmart,
Target, and several drugstore chains. The many industries that sell through those
channels have seen their profit margins squeezed because they have no other
customers of comparable size and those retailers have the wherewithal to switch
vendors.
Threat of substitute products

When multiple products from different industries all serve the same purpose for custo
mers, they are called substitutes. They place a ceiling on an industry’s ability to
increase prices and grow. Taxi fares, for example, are kept in check in cities with
robust public transportation.
Intensity of rivalry

Players in almost every industry compete with one another, but if that competition
manifests itself in aggressive actions, everyone’s profits can suffer. Intense rivalry is
common when -
u the competitors are of similar size
u sell undifferentiated products
u when industry growth is slow
u high fixed costs
u overcapacity in the industry
u investments in assets that cannot be repurposed

Competition is most harmful when it results in aggressive, sustained price wars, which
decrease the available profit pool for everyone.
 Opportunity of complements

A firm has a complement when its goods are made more valuable by those of another firm.

Businesses can create significant value when they complement one another, even while
competing to claim that value.

The key factor in the power of complements is how easily buyers and the complements
themselves are able to switch to alternatives. Buyers who cannot easily switch to another
platform, as was the case with most PC manufacturers as well as end users, give the
complements significant power. If they cannot take their business elsewhere, the
complementors are free to set a high price for their goods and services. Between
complementors, the ability of one to switch weakens the claims of the other.
 Structural forces

When it comes to creating strategy, understanding structural forces provides nothing more
than the starting point. Firms must choose how they respond to these forces.

Performance differences among industry participants are the result of where and how they
have each chosen to engage with their environment.

The questions the strategist faces-

u Which market segments are the most attractive?

u How can other companies be discouraged from entering the market?
u How can leverage over buyers or suppliers be increased?
u How will the structural forces evolve?
 Integrated set of choices (achieving
internal consistency)

The firm decides how to compete with its business model, which is the underlying logic of
the firm, how it operates, and how it creates and captures value.

The business model itself consists of many other choices. The stronger the fit of those choices
, the more robust the business model is and the more difficult it is to replicate.

Also implicit in these choices is the need to make tradeoffs, recognizing that the most
important choices, if they are to be executed effectively, usually involve a decision not to
do something else.
 Business models

Maruti vs BMW
Marks & Spencers vs John Players

There are two fundamental considerations in any business model: the value proposition and
the target market. The value proposition, in its most generic sense, can be based on either
differentiation or low cost.
Fit

For a business model to work, the firm’s chosen activities need to demonstrate fit.

First, and most obviously, they need to fit the firm’s value proposition
(differentiated or low cost?) and its target market (broad or narrow?).

This is simple consistency.

Second, the choices should be mutually reinforcing.

Finally, the choices should fit in a way that enables optimization of effort,
thereby enabling cost efficiencies among its activities. Each decision makes
the others easier to execute and therefore strengthens the business model.
Trade-offs

Of course, activities that fit together imply that the converse is true: There are
other activities that would not fit.
A well conceived business model invariably demands trade-offs.
Final word

Few businesses can succeed in being all things to all people. Those that can, and
can make money at it, find success is fleeting. Inevitably, segment
specific needs will emerge and more focused competitors will find ways to
meet those needs more capably.

A firm’s business model succeeds when it can profitably meet market demand with
choices that are consistent, mutually reinforcing, and collectively optimal. It works
best when tradeoffs are recognized and accepted, ensuring that parts of the
business are not working at cross purposes. This is the essence of making an integrat
ed set of choices, and this is the key to allowing the firm to establish and defend its
place on the business landscape.
Positioning on the Business Landscape:
Achieving External Consistency

Firms aim to maximize the wedge between their supplier opportunity cost and
their customers’ willingness to pay.

Firms that command and sustain a larger wedge than their peers are said to
have a competitive advantage.

The business landscape metaphor suggests that there are areas (that is, market
segments) of higher potential profit where the wedge has been widened. Occupying
those spots requires the right strategy, one that exhibits consistency on all fronts. The
business model must be internally consistent and must fit with the realities of the
environment—
that is, it must also be externally consistent. Finding and occupying these points on the
landscape is strategic positioning.
Performance over the Long Run:
Dynamic Consistency

For a firm that has created a competitive advantage, maintaining dynamic

consistency is a matter of dealing with threats. As discussed earlier, a firm creates and
captures value through its positioning and business model. Neither the position nor the
model is permanent; however, with enough time and pressure, outside forces can
prove disruptive.
Performance over the Long Run:
Dynamic Consistency

Imitation
Any profitable success by one firm will lead other firms to try to replicate it; profits draw
a crowd.

It is, of course, possible to create barriers to imitation. If a firm achieves economies of

scale or scope (that is, if it is large in a specific market or in interrelated markets), would-
be imitators may be deterred.
Long:term contracts and relationships, institutional knowledge, network externalities, a
credible threat of retaliation, and strategic complexity can also convince potential
competitors that profitable imitation will be difficult.
Performance over the Long Run:
Dynamic Consistency

Substitution
Threats from substitute offerings are generally difficult to predict and manage. They
occur when demand shifts as a result of changes in technology or customer needs.

Threats from substitution can be quite dramatic, as when a wholly new paradigm
reshapes the business landscape, uncovering new areas of value and destroying others.

Businesses that face the threat of substitution can fight back by further differentiating or
incorporating thebenefits that are shifting demand. If the shift is unavoidable, a firm may
even choose to encourage substitution, but on its own terms, for example, by using an
established brand and superior cost position to accelerate substitution while protecting
market share.
Performance over the Long Run:
Dynamic Consistency

Holdup

Holdup occurs when the bargaining power of a firm’s buyers, suppliers, or complements
increases, allowing them to capture more value. Growing dependence on, or
interdependence among, these parties can lead to greater overlap and conflict in
claiming value.

Firms can mitigate the threat of holdup by broadening their base of suppliers or
customers, establishing contractual protections, or pursuing vertical integration (that is,
taking over more of the activities in their supply chains).
Performance over the Long Run:
Dynamic Consistency

Slack

The final threat is internal: It comes from poor management and suboptimal
performance. Slack is waste and inefficiency that ultimately weaken the firm. Lack of
discipline and accountability can lead to slack, resulting in unwise investments or a
bloated cost structure.

Careful performance monitoring, alignment of managerial incentives, and commitments

to return cash to shareholders can reduce this type of waste.