SI 422SI midterm. Introduction to Strategy

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Introduction to Strategy Porterian view What is strategy?  Operational effectiveness: refers to the extent to which a firm performs similar activities better than rivals  Strategy: refers to ... performing different activities from rivals or performing them in a different way o Choose the right configuration & make the right trade-offs o Rests on unique activities Who wins & why?  Porter believes that firms can achieve competitive advantage only if they have both operational effectiveness & a superior strategy (that fits with demands of the environment)  Long-term organizational (firm) performance depends, to a large degree, on the environment (industry) in which the organization competes What is a strategic activities map?  A picture that identifies the key activities of a firm (tradeoffs & investments) & identifies the linkages b/w them  Can be further linked to costs & customer willingness to pay Grant & Jordan view What is strategy?  Designed to help the firm use its internal resources & characteristics to deal with its industry & competitive environment; all about the fit w/ the firm & its environment  A unifying theme that gives coherence & direction to the actions & decisions of an individual or org What is the difference b/w strategy & tactics?  Strategy is the overall plan for deploying resources to establish a favorable position o Important, involve significant commitment of resources & not easily reversible  Tactic is a scheme for a specific action What is the difference b/w strategy & management?  Strategy: refers to the unifying themes of the organization  Management: refers to the organization’s specific policies & practices  Management practices should be determined by the firm’s strategy Role of firm strategy = sources of superior profitability  How do we make money? o Industry attractiveness – Which industries should we be in? Corporate strategy o Competitive advantage – How should we compete? Business strategy Mintzberg view Strategy Design vs. Strategy Emergence  Believes it’s incomplete to consider strategy as something that can be designed (analyzed), instead recognize that strategy emerges & changes over time regardless of how carefully it’s planned  Strategy as a design – planning & rational choice = intended strategy  Strategy as a process – many decision makers responding to multitude of external & internal forces = emergent strategy  Together these form the realized strategy Industry Analysis Five Forces Analysis Purpose?  Helps us make recommendations to firms on how to improveo Overall industry environment o Firm’s position relative to its industry environment  Assess current avg industry profitability of incumbent firms  Helps us understand the impact of trends & events on avg industry profitability Economic Models of Industry Profit Perfect Competition Monopolistic Competition Oligopoly Monopoly Assumptions Entry Many firms No differentiation No entry cost Price & Entry Many firms Some differentiation Entry cost > 0 Undifferentiated Q Differentiated P Few firms Entry cost > 0 P => Q Differentiation irrelevant One firm Entry cost >> 0 Outcomes P = MC Econ profit = 0 P > MC Econ profit = 0 P > MC Econ profit > 0 P >> MC Econ profit >> 0 Examples Taxi drivers Restaurants Soft drinks Patented drugs How can we recognize a monopoly?  Monopolists raise prices & limit output o Good for company profit, but bad for consumers b/c they have to pay higher prices & get lower quality  Look at % of market share Determinants of Industry Profitability  Industry: define the industry based on similar products that have common suppliers & buyers  Suppliers: organizations that firms in the industry pay  Buyers: organizations that pay firms in the industry  Rivals: firms in same industry  Substitutes: stuff that could be alternative to industry’s products  Potential entrants: firms (current/potential) that could enter industry  The power of buyers, suppliers & industry rivalry determines who gets the profits that the industry could potentially generate  The threat of entry & substitutes determine whether the industry value chain can generate any profits at all If economic benefits are generated, which step in the value chain gets the greatest share?  If suppliers/buyers are very price sensitive & have high bargaining power = can squeeze profits out of the industry What can suppliers do to industry?  Strong suppliers can raise industry avg costs or deliver lower quality Weak suppliers can be forced to accept lower cost or to deliver higher quality What can buyers do to industry?  Strong buyers can force to keep prices low or deliver higher quality  Weak buyers can be forced to accept high prices or low quality What makes suppliers powerful? Will be powerful if…  More concentrated than industry to which it sells  Don’t depend heavily on industry for revenues  Industry members face switching costs in changing suppliers  Offer differentiated products  No substitute for what supplier provides  Can forward integrate more easily than industry customers can backwards integrate What makes buyers powerful? Will be powerful if…  There are few buyers, each purchasing high volume  Industry sells standardized/undifferentiated products  Face no switching costs  There are substitutes w/ similar price/value ratio  Can integrate backwards more easily than industry firms can integrate forward What makes buyers weak?  There is differentiation  There is loyalty present  Switching costs are high o Describe the “costs” that customers must bear when they try to switch from one product to another Do incumbents keep economic benefits?  If it is easy to enter an industry, entrants can rush into profitable industries & drive down profits  If rivalry is high then profits will be eroded as firms compete by driving down prices or raising costs  Profit will be limited based on whether other products offer similar value for similar price Threat of substitutes  If alternatives products have similar price-value ratio then power of substitutes is high  Rivals are all firms that compete within the industry o Competing for the same suppliers o High rivalry = competition that drives down prices or drives up costs o Intense rivalry can drive prices down/costs or quality up o Weak rivalry allows prices to stay high  Substitutes are products that are outside the industry o Use different suppliers o Close substitutes can drive prices down or force costs or quality up o Weak substitutes allow prices to stay high Why is rivalry higher when an industry has more firms?  Few rivals = firms less likely to respond to competition by lowering prices & increasing costs, easy to observe other firm’s actions & coordinate  Many rivals = price & cost wars, each firm fights intensely for market share Intensity of rivalry (low rivalry)  Few rivals  Different sizes  Growing industry  Low exit barriers High switching costs  Favorable demand & supply Threat of Entry/Barriers to Entry  Key issue is how easy is it for new firms to enter our industry & become rivals  If entry barriers are low then firms could more easily enter the industry (in good times) to compete away profits & firms in the industry must act to deter potential entry – either by lowering prices or by driving up costs (quality) Factors that affect entry barriers (high barriers to entry)  If economies of scale exist  If products are very differentiated  High capital requirements  Cost disadvantages for new entrants  Access to distribution channels difficult to get  Favorable gov policies What are economies of scale?  Economies of scale arise when size matters so big firms = much lower avg costs Role of Gov?  Regulatory policy may make entry more difficult or easy  Policy regarding unions & strikes can affect supplier power  Anti-trust policies have substantial impact on rivalry Approaches to improve industry & firm profitability  Avoid rivalry & substitutes  Raise barriers to entry  Position to weaken exposure to supplier/buyer power  Either by using lobbying efforts or creative tradeoffs Force Industry Avg Firm is… Barriers to entry Medium Same as industry avg Supplier power High Stronger than industry avg Buyer power High Stronger than industry avg Rivalry Medium Same as industry avg Substitutes Medium Same as industry avg Overall Profit < economy avg Profit > industry avg Applying Five Forces Framework Step 1 – Define the industry  Create clear, concise description of the industry, which is comprised of competitors selling similar products/services & competing for same suppliers & customers (buyers) Step 2 – Identify the organizations/products involved in each relevant force  Suppliers, buyers, substitutes, rivals, potential entrants Step 3 – Assess strength of the forces within the industry  Ask whether the factors that affect each force are sufficient to raise costs, lower prices or enable profits to be competed away Step 4 – Ascertain the Overall Effect of the Forces  Assess whether any of the forces are so strong (or so weak) that they’ll have an exceptional impact on overall industry profits Step 5 – Trends & Changes  Ask how those trends & changes will affect the strength of each of the forces [Show More]

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