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TRANSCRIPT
BCST 3800
Lecture 2
• Components of a Strategy
• Introduction to Diamond E and PEST Analysis
• Porter
Strategic Tension & The Business Model
WANT
NEEDCAN
Value Proposition
Goals
Core Activities
Product/Market
Strategic Tension
Strategic
Tension
WANTManagement Preferences
Individual
NEEDEnvironment
Industry
CANOrg’n, Res. & Cap’s
Firm
4
CONCLUSIONS: STRATEGY—what it is and isn’t
•Is• Unique proposition
• Choosing what NOT to do• Activities that fit together
• Continual improvement to realize purpose
•Isn’t• Best practice
improvement• Execution
• Agility
• Flexibility• The Internet (or
technology)
• Mergers/acquisitions
5
Management
Preferences
Organization Strategy Environment
Capabilities
& Resources
Goals
Product/Mkt
Competitive Premise
Business System
Environment
The Diamond E Framework
The ability toAnalyze thisIs Key
Management
Preferences
Organization Strategy Environment
Capabilities
& Resources
Diamond E Framework: Tensions
CAN DO
Management
Preferences
Organization Strategy Environment
Capabilities
& Resources
Diamond E Framework: Tensions
WANT TO DO
Management
Preferences
Organization Strategy Environment
Capabilities
& Resources
Diamond E Framework: Tensions
NEED TO DO
Management
Preferences
Organization Strategy Environment
Capabilities
& Resources
Diamond E Framework: Tensions
NEED TO DO
WANT TO DO
CAN DO
Strategic Risks
10
Errors in reading the enviro
cause failure
Internal cap’yDevelop inconsit’y
With strategy
Strategic demandsExceed the Capacity to
execute
Enviro changesMake the Strategy obsolete
RIS
KS
TIME HORIZON
Enviro
Capability
Long-TermShort-Term
The Process of Strategic Analysis
Step 1: Base Case Analysis
Assess the strategic position of the bus
and the urgency for action
1. Assess past performance
2. Identify and evaluate the current
strategy
3. Forecast future performance under
current strategy
4. Decide on the need, nature, and
speed of change
Step 2: Strategy Formulation and
Testing
Develop and evaluate proposals to
address business opp’y and challenges
1. Work from the enviro and
capabilities to generate new
proposals
2. Use the drill to shape and short-
list proposals
3. Prepare performance forecasts
Step 3: Decision and Implementation
Commit, implement, and review
1. Decide on Proposals to implement
2. Move to build commitment and
develop required capabilities
3. Implement
Assessing the Environment
Macro Forces - PEST
Political Social TechnologicalEconomic
Assessing the Environment
Micro Forces -
SupplyDemandCompetition
Assessing the Environment
Macro Forces - PEST
Micro Forces -
Political Social TechnologicalEconomic
Supply DemandCompetition
MANAGEMENTPREFERENCES
ORGANIZATIONSTRATEGICCHOICES
ENVIRONMENT
RESOURCES &CAPABILITIES
Strategy and Environment Linkage
New StrategyMust Fit
MANAGEMENTPREFERENCES
ORGANIZATIONSTRATEGICCHOICES
ENVIRONMENT
RESOURCES &CAPABILITIES
Strategic ChoicesRepeatedly Reviewed
Strategy and Environment Linkage
New StrategyMust Fit
MANAGEMENTPREFERENCES
ORGANIZATIONSTRATEGICCHOICES
ENVIRONMENT
RESOURCES &CAPABILITIES
Need to understand Industry economics
and competitive environment
Strategy and Environment Linkage
New StrategyMust Fit
18
identifying the organization’s opportunities
Opportunities in
the EnvironmentOrganization’s
Opportunities
Organization’s
Resources/Capabilities
Porter’s 5 Forces and Generic Strategies
BCST 3800
Forces Driving Industry CompetitionPORTER’S FIVE FORCE ANALYSIS
INDUSTRY COMPETITORS
Rivalry AmongExisting Firms
POTENTIAL ENTRANTS
SUPPLIERS BUYERS
SUBSTITUTES
Threat of new entrants
Bargaining power of buyers
Threat of substitute products or services
Bargaining power of suppliers
Potential Entrants
Barriers to Entry:1. Economies of scale and scope
2. Product Differentiation
3. Capital Requirements
4. Patents and the Learning Curve
5. Access to distribution channels
6. Government Policy
Suppliers
Supplier power is strong when:• Only a few companies supply input
• Input is unique or switching costs are high
• No close substitutes
• Credible threat of forward integration
• Industry not a significant customer of supplier group
Buyers
Are powerful if:• A concentrated group or buy in large volume
• The industry’s product is homogeneous
• The product is a significant % of buyer’s cost
• The product is unimportant to quality of buyer’s final good or service
• The product does not offer buyer cost advantage
• Threat of backward integration
Substitutes
Place ceiling on PricesAre of concern:
• The greater the price/quality trade-off
• Produced by industries earning high margins
• Produced by industries that have high level of competition internally
• Are constantly changing due to R & D, trends
Rivalry
Factors influencing intensity :
• Many equal sized firms
• Mature industry or slow growth
• Homogeneous product
• Low switching costs
• Excess capacity
• Exit Barriers
Generic Strategies
• Porter describes strategy as actions that create defendable positions.
Defensive:
• Take market structure as given
• match its strengths and weaknesses
Offensive:
• alter the competitive environment
Three Generic Strategies
1. COST LEADERSHIP
2. DIFFERENTIATION
3. FOCUS OR NICHE STRATEGY
Cost Leadership
• the lowest per-unit (i.e., average) cost in the industry
• profits will be low but higher than competitors
• having lowest cost among a few rivals where each firm enjoys pricing power and high profits.
Cost leadership is independent of market structure.
Cost Leadership
Defendable Strategy:• It defends the firm against powerful buyers.
• It defends against powerful suppliers by providing flexibility to absorb an increase in input costs
• Cost leadership provides entry barriers • Economies of scale requires entry with substantial capacity to
produce, and this means the cost of entry may be prohibitive
Cost Leadership
Requirements:
• Large up-front capital investment in new technology
•Continued capital investment
•Process innovation
• Intensive monitoring of labour• frequently have an incentive-based pay structure
• Tight control of overhead.
Differentiation
Approaches to differentiation:
• Different design
• Brand image
• Number of features
• New technology
A differentiation strategy may mean differentiating along 2 or more of these dimensions.
Differentiation
Defendable strategy:
• Insulates a firm by creating brand loyalty
• Lowers the price sensitivity of customer (elasticity of demand)
• Creates barriers and reduces substitutes.
• This leads to higher margins, which reduces the need for a low-cost advantage.
• Higher margins give the firm room to deal with powerful suppliers.
• Mitigates buyer power - fewer alternatives.
Differentiation
Requirements:•Exclusivity
• Strong marketing skills.
• Product innovation as opposed to process innovation.
• Applied R&D.
• Customer support.
• Less emphasis on incentive based pay structure.
Focus or Niche Strategy
• Focus on a buyer group, product segment, or geographical market.
• The focus or niche strategy is built on serving a particular target (customer, product, or location) very well.
• A focus strategy means achieving either a low cost advantage or differentiation in a narrow part of the market.
Stuck in the Middle
• Failure to develop a strategy in one of these 3 directions
• Lack the market share, capital, and overhead control to be a cost leader
• lack the industry wide differentiation necessary to create margins
• implies low profits
• Classic examples of this problem are large, international airline companies
• Depending on capabilities and resources, must gravitate toward either low cost or focus or differentiation
Risks
Cost leadership risks:• Innovations nullify past inventions and learning
• Requires continual capital investment
• Attention to cost can blind firms to changes in product requirements.
• Cost increases narrow price differentials between competitors
Differentiation risks :
• Cost difference between low cost and differentiating firms becomes too large
• Buyers trade-off features, service, or image for price.
• Buyers need for differentiation falls.
• Imitation decreases perceived differentiation.
Transit versus Car(the opportunity Cost problem)
• Suppose:
• distance to work is 10 miles or 16 KM
• Price of gas is $1.38 Litre
• By car, trip takes 20 minutes
• Bus costs $3.75 per trip (2 zone)
• Bus takes 30 minutes longer than car (50 minutes)
• Average wage is $30 per hour and is the opportunity cost of time
Example
• Cost of driving:• Honda Accord (gets 40 MPG) costs $0.08 per KM in Fuel
• 16 KM trip costs $3.11 in fuel
• Cost of transit:• $3.75 fare
• $15 cost of time (30 min @ $30/hr)
• Difference: • Transit cost $15.64 more per trip
Example
• The annual additional cost of transit is $4,500
• To make cost of driving equal the cost of transit, gas price at pump would need to rise to $20 per Litre
• If 5 million workers face the same cost, the total value is
• $18 Billion per year
• Enviroment Canada’s Entire budget is $1 Billion