the fundamentals of strategy - tmla.nl · pdf fileenhanced swot (how) translate into tasks for...

The Fundamentals

of Strategy

Oliver W. Olson

Olson@msm.nl

November 22, 2017

Who am I?Work:

• 13 years in banking

(USA)

• 3 years in brand

management

(Germany)

• Past 12 years in

management education

(Hungary, Romania,

Netherlands)

• 20+ years in marketing

& strategy

Countries:

• USA

• Sweden (University)

• Germany

• Romania

• Hungary

• Netherlands

Who am I?

Strategy????

What do you think we will

learn in the Strategy Course?

What did I think in my MBA?

Why Coffee?

Why Keurig?Let me explain…

Europe…

Philips

Senseo

Nescafe

Nespresso

Kraft Foods

Tassimo

Nescafe

Dolce Gusto

But I return to the USA in 2012 to find….

Coffee shops make up the FASTEST GROWING part of the restaurant

business, checking in with a 7% annual growth rate!

World coffee production is estimated at 130 - 140 million bags per

year!

Expected to increase to 175 million bags by 2020

14 billion espresso coffees are consumed each year in Italy, reaching

over 200,000 coffee bars, and still growing!

Americans consume 400 million cups of coffee per day, or equivalent

to 146,000,000,000 (146 Billion) cups of coffee per year; making the

United States the LEADING CONSUMER of coffee in the world.

Japan ranks number 3 in the world for coffee consumption.

Coffee is the world’s second largest commodity, after petroleum.

(All data from 2015)

What’s the link between Coffee

and Strategy?

What is strategy?

“Management is not just passive, adaptive

behavior… It means taking action to make

the desired results come to pass.”

Peter Drucker, The Practice of Management

“Strategy […] is largely a pipe dream. Why?

Because you can sit in a boardroom and plot

all you’d like, but once the game has

started, it’s pretty much improvisation from

that point forth.”

Duff McDonald, The Firm,

The Inside Story of McKinsey

The summation of Strategy

The Value Equation

Value = Perceived Benefits / Cost

(V=PB/C) If Value is greater than or equal to 1, then a customer will tend to

purchase the product given

The customer is aware of the product

There are no substitutes for which Value is even greater than your

product.

The customer can afford the Cost of the product

Benefits = Perceived Benefits

Function(s)

Status

Brand

Other?

The Communication Process

Competitive Advantage

Definition: the ability to create more economic

value than competitors

Mission Objectives

External

Analysis

Internal

Analysis

THE STRATEGIC MANAGEMENT PROCESS

External and Internal Analysis

External Analysis

Systematic Examination

of the Environment

Internal Analysis

• interest rates

• demographics

• social trends

• technology

• human resources

(knowledge)

• manufacturing

abilities

• technology

Competitive Advantage

Definition: the ability to create more economic

value than competitors

Mission Objectives

External

Analysis

Internal

Analysis

Strategic

Choice

THE STRATEGIC MANAGEMENT

PROCESS

Strategic ChoiceExternal

Analysis

Internal

Analysis

Strategic

Choice

Business

Level

Corporate

Level

Positioning a

business

Which

businesses?

Competitive Advantage

Definition: the ability to create more economic

value than competitors

Mission Objectives

External

Analysis

Internal

Analysis

Strategic

Choice

Strategy

Implementation

Strategy Implementation (Marketing)

• how strategies are carried out

• who will do what

• organizational structure and control

• who reports to whom

• how does the firm hire, promote, pay, etc.

A Strategy Is Only As Good As Its

Implementation

Strategy Implementation

• every strategic choice has strategy implementation

implications

• strategy implementation is just as important as

strategy formulation

The Strategic Management Process

Competitive Advantage

Definition: the ability to create more economic

value than competitors

Mission Objectives

External

Analysis

Internal

Analysis

Strategic

Choice

Strategy

Implementation

Competitive

Advantage

Marketing

Competitive Advantage

Definition: the ability to create more economic

value than competitors

- all other elements of the strategic management

process are aimed at achieving competitive

advantage

Mission Objectives

External

Analysis

Internal

Analysis

Strategic

Choice

Strategy

Implementation

Competitive

Advantage

The Tools of strategy…

“Strategic GPS Satellites”

VRIO – (WHY)

Internal and External Data

Qualitative

SWOT – (WHAT)

Internal (SW) and External (OT)

Qualitative

Extended SWOT – (HOW)

Use the SWOT Data

Qualitative

5-Forces + 1 – (WHAT)

External Data

Qualitative

GE / BCG Matrices – (WHERE)

Internal and External Data

Quantitative

CAGE Analysis – (WHERE)

External Data

Qualitative

PEST(EL) – (WHERE/WHEN)

External Data

Qualitative

Porter’s Diamond – (WHY)

External Data

Qualitative

BCG Diamond – (HOW)

Internal Data

Qualitative

Innovation Types – (HOW)

Leading Change – (HOW)

VRIO (WHY)

VR

IO F

ram

ew

ork

SWOT (WHAT)

SW

OT

An

aly

sis

ENHANCED SWOT (HOW)

Translate into tasks for the

Project Plan Strengths Weaknesses

Opportunities

How do I use these strengths

to take advantage of these

opportunities?

How do I overcome the

weaknesses that prevent me

taking advantage of these

opportunities?

Threats

How do I use my strengths to

reduce the likelihood and

impact of these threats?

How do I overcome the

weaknesses that will make

these threats a reality?

5 FORCES + 1 (WHAT)

Fiv

e F

orc

es M

od

el

Complementors

BCG MATRIX (WHERE/WHAT)

GE MATRIX (WHERE/WHAT)

CAGE ANALYSIS (WHERE)

PESTEL (WHERE/WHEN)

BCG GLOBAL ADVANTAGE

DIAMOND (HOW)Growth Advantage

Resource Leverage Advantage

“Manyness”

Advantage

Integration

Advantage

Market

Access

Resource

Access

Local

AdaptationNetwork

Coordination

• Talent

• Assets

• Raw Materials

• Knowledge

Competitive Advantage

A product differentiation strategy must meet the

VRIO criteria…

Is it Valuable?

Is it Rare?

Is it costly to Imitate?

Is the firm Organized to exploit it?

…if it is to create competitive advantage.

VRIO

VRIO Breakdown

Value

“Do Resources and Capabilities:

Exploit an external opportunity

Neutralize an external threat?

(Enhanced SWOT?)

Cost (i.e. - Keurig Brewer)

Rare

“How many competing firms already possess particular valuable resources and capabilities?”

Patented

Imitability

“Do firms without a resource or capability face a cost disadvantage in obtaining or developing it compared to firms that already possess it?”

Organization

“Is a firm organized to exploit the full competitive potential of its resources and capabilities?”

Organizational Support in the

VRIO Model…

Founded 1970

Locations (4,960 km apart):

Xerox headquarters: New York

Parc headquarters: California

Innovations

The personal computer

Laser printers

Computer-generated bitmap graphics

The Graphical user interface, featuring windows and icons,

The computer ‘mouse’

The WYSIWYG text editor

Ethernet as a local-area computer network

4,960 km apart

VRIN?

N = Non-Substitutibility

Product or Service Substitution

Postal Service -> Email

Record Store -> iTunes

GPS unit -> iPhone app

Competence Substitution

Skilled workers -> Automation/Machines

Translators -> Google Translate

Strategy Exercise

Create a VRIO for your companyWal-Mart

“The Big Lie of Strategy”

Overview: Strategy is what compels customers to

give the company its revenue.

Planning, Cost Control and Capabilities are what determine

whether the revenue can be obtained at a price that is

profitable for the company.

Comfort Traps

1. Strategic Planning

Strategy <> Planning: Planning does not question

assumptions.

2. Cost-Based Thinking

Revenues cannot be planned like costs

3. Self-Referential Strategy Frameworks

Strategy is about your customers, not your firm.

“The Big Lie of Strategy” Escaping the Traps

1. Keep the Strategy Statement Simple

Which customers to target

How to create a value proposition for these

customers

2. Recognize that Strategy is not about perfection

Strategy is a ‘bet’

3. Make the logic explicit

What do you believe about the customer?

What do you believe about the evolution of the

industry?

What do you believe about the competition?

What do you believe about your firm’s capabilities?

Competitive Advantage

Definition: the ability to create more economic

value than competitors

- all other elements of the strategic management

process are aimed at achieving competitive

advantage

Mission Objectives

External

Analysis

Internal

Analysis

Strategic

Choice

Strategy

Implementation

Competitive

Advantage

Strategy review

Strategy Review

“Choose Markets Wisely”

Corp

ora

te L

evel Str

ate

gie

sVertical Integration*

Diversification

Strategic Alliances*

Mergers & Acquisitions*

Global Strategies….

Strategy Review

“Compete Fiercely”

Busi

ness

Level Str

ate

gy

Strategy Review

“Specialize Effectively”

Functi

onal Str

ate

gie

s

The Ability to Create More Economic

Value Than Competitors

• there must be something different about a

firm’s offering vis-à-vis competitors’offerings

• if all firms’strategies were the same, no firm

would have a competitive advantage

• competitive advantage is the result of doing

something different and/or better than

competitors

Temporary & Sustainable

• competition limits the duration of competitive

advantage in most cases

• profits attract competition

• competitive advantage typically results in

high profits

Therefore,

• most competitive advantage is temporary

• competitors imitate the advantage or offer

something better

Temporary & Sustainable

Some competitive advantages are sustainable if:

• competitors are unable to imitate the source

of advantage

• no one conceives of a better offering

Of course,

• in time, even sustainable competitive

advantage may be lost

Competitive Parity

• the firm’s offerings are ‘average’

• people do not have a preference for the firm’s

offering

• the firm does not have a cost advantage over others

• some things that may lead to competitive parity

may still be critical to success (e.g., telephones)

Competitive Disadvantage

• people may have an aversion to the firm’s

offering

• the firm may have a cost disadvantage

• a firm may have outdated technology/equipment

• a firm may have a negative reputation

Emergent vs. Intended Strategies

• the strategic management process leads

managers to intended strategies

However,

• conditions often change or new information

becomes available

• managers respond and adopt emergent strategies

Example: Honda Motorcycles

Summary

Firms could achieve competitive parity and survive

• they would face a flat demand curve

• their cost structure would be the industry average

• they would need to adapt their strategy over

time just to survive

• they would fail if they didn't adapt their strategy

Summary

This course is not about mere survival, it is about

thriving—achieving competitive advantage

• the strategic management process helps managers

achieve competitive advantage

• competitive advantage depends on differences

• strategy is about discovering and exploiting

these differences

Business Level Strategies

Two Generic Business Level Strategies

Cost Leadership:

• generate economic value by having lower

costs than competitors

Product Differentiation:

• generate economic value by offering a

product that customers prefer over

competitors’product

Example:

Example:

Product Differentiation

A business level strategy intended to:

• increase the perceived value of

the focal firm’s products and/or

services relative to the value of

competitor’s products and/or

services

• create a customer preference

for the focal firm’s products

and/or services

Cost Differentiation

A business level strategy

intended to:

• focus on gaining advantages

by reducing its costs to below

those of all its competitors.

• a firm must also focus on other

competitive advantages, if

reducing cost is the ONLY focus,

no one will want the product.

Bases of Differentiation

A base of differentiation must fill some

customer need:

• image

• status

• comfort

• taste

• beauty

• style

• furthering a cause

• reliability in use

• safety

• nostalgia

• cleanliness

• service • accuracy

• hunger

• belonging

A differentiated product fills one or

more needs better than the products of

competitors

Vertical or Horizontal Differentiation

Horizontal Differentiation

Product value is evaluated differently by

different consumers

Vertical or Horizontal Differentiation

Vertical Differentiation

All consumers evaluate products

equally, placing higher value on

higher quality products

Horizontal

Differentiation

Bases of Differentiation

Three Categories

1) Product Attributes

2) Firm—Customer Relationships

3) Firm Linkages

• exploiting the actual product

• exploiting relationships with customers

• exploiting relationships within the firm

and/or relationships with other firms

Bases of Differentiation

Product Attributes

• Product Features – the shape of a golf club head

• Product Complexity – multiple functions on a watch

• Timing of Introduction – being the first to market

• Location – locating next to a freeway exit

Bases of Differentiation

Firm-Customer Relationships

• Customization – creating a unique diamond

bracelet for a customer

• Consumer Marketing – creating brand

loyalty to a soap through image advertising

• Reputation – sponsoring the local homeless

shelter to engender positive community

response

Bases of Differentiation

Firm Linkages

• Linkages among Functions in the Firm

– using a circuit board designed in one

division in other divisions

• Linkages with other Firms – a sporting

goods store sponsors a benefit race by

donating running shoes and receives

free radio advertising in return

• Product Mix – a furniture store begins to

sell home gym equipment, computers, and

lawn mowers

Bases of Differentiation

Firm Linkages

• Distribution Channels – a doughnut shop begins to

sell its doughnuts through gas stations

• Service and Support – an oil

change shop begins to offer pick

up and delivery of cars in an office

building’s parking garage

Fragmented Industry

Branding: commodity differentiated product

Example: Converse Sneakers

Emerging Industry

First mover advantages: captures market share

Example: Google Android

Exploiting Industry-type Opportunities

The Value of Product Differentiation

Exploiting Industry-type Opportunities

Mature Industry

Refining product or adding services

Example: Virgin

Declining Industry

Exploiting niches: serving those with strong needs

Example: NEWT at the Royal Hawaiian

The Value of Product Differentiation

Exploiting Other Opportunities

Trends or Fads

• accessories

for mobiles

Government Policy

• Toyota Prius

• airport x-ray machines

Social Causes

• themed credit cards

• organic products

Economic Conditions

• car warranties

• holiday homes in Spain

The Value of Product Differentiation

Imitability of Product Differentiation

Substitutes

• some substitutes may be obvious

• some substitutes may not be obvious

• if no substitutes are obvious, then we would

conclude that imitation through substitution

will be costly—at least for the present time

• if a base of differentiation is valuable, others

will attempt to imitate it through duplication

and/or substitution

Summary

• product differentiation creates customer preferences

• preferences allow firms to make above normal profits

• almost anything can be a base of differentiation

• bases of product differentiation that meet the

VRIO criteria may generate competitive advantage

• a product differentiation strategy is only as good

as its implementation

“Stuck in the Middle”

It can be argued that firms should either pursue a

cost advantage or a benefit advantage but not

both.

Firms that pursue both could, according to this

argument, get stuck in the middle and have

neither advantage.

Stuck in the Middle?

In reality, however, successful firms appear to have both types of advantages.

Firms that offer high quality products expand market share and enjoy cost advantages due to economies of scale and learning

Learning economies may be more important for high quality production than for low quality production

High quality producers may also be more efficient producers

“Stuck in the Middle”

Trying to attain excellence in all dimensions often

leads to unfocussed decision making.

Trying to achieve cost advantage and benefit

advantage may lead to uninspired imitation of

“best practices.”

What do Starbucks and Keurig have in

common?

Q: What is the difference between a

‘strength’ and a ‘competitive

advantage’?

A: Strength : A positives feature, attribute or asset

(e.g experienced staff / Better marketing tools, etc.)

Competitive Advantage : Absolute Strength over competitor, something unique

and its value is considered.

Sustainable competitive advantage : competitive advantage over a longer

period of time, something like a major breakthrough in technology usage which is

not available or will not be available (such as google seach engine database) or a

patented technology or process.

Innovation as a

strategy

Incremental Innovations

When there are minor changes in

technology, they are either simple

product improvements or line

extensions that minimally improve the

existing performance.

• Toothbrushes

• Shampoo

• Cars

• Printers

• Coffee makers (alarm clock built-in)

Breakthrough innovations

They are novel, unique or state-of-the-art

technological advances in a product category

that bring changes in the consumption

patterns of a market.

There are two types:

• Growth of existing technology which can

also be defined as "technology-based

innovations"

• Changing or diversifying from current

market segment also termed as "market-

based innovations"

Breakthrough innovations

• Electric toothbrush

• Anti-dandruff shampoo

• Hybrid Cars

• Color printers

• Single-serve 'pod' coffee

Radical Innovation

"Shun the incremental and look for a

quantum leap"

- Jack Welch

• Explores new technology

• High uncertainty

• Focuses on products, processes or services

with unprecedented performance features

• Creates a dramatic change that transforms

existing markets or industries...

• ...or creates new ones

Disruptive Innovation

Clayton Christensen, "The Innovator's Dilemma"

A company that does everything by the book — listening

to customers, managing by facts, being disciplined

about costs and quality, and so forth — can get

blindsided by an innovation that rapidly takes away its

markets, because it was doing everything right.

The innovations that cause this “why bad things happen

to good companies” dilemma are disruptive

innovations.

The signature story of disruption reads as follows: an

upstart low-end competitor displaces a much larger

incumbent in a market, with the incumbent either

retreating upmarket to higher margin/lower volume

products or dying out altogether.

Disruptive Innovation

• Music

o Records->Cassettes->CDs->downloads

• Low Cost Airlines

• Android Phones (HTC)

• Digital photography (Kodak)

• News (print vs. online)

• Universities (MOOC)

Starbucks Innovation

Via Blonde Roast

Nestle Nespresso

Global ‘Capsule’ Sales in 2013:

$10.8 billion

Nestle share: almost 33% ($3.5 billion)

“Nestlé Loses a Clash Over Single-Serve Coffee”

Case brought in French court by Douwe Egberts /

Senseo regarding unfair competitive practices

France accounts for 25% of Nespresso sales

($0.9 billion)

French courts ruled that any measures that

Nestle takes to limit other manufacturers from

producing coffee for its machines is not legal.

The Diffusion S-Curve

Patents Exaggerated?

"...there's a lot more than intellectual property

protection that drives innovation and

influences market share. For the twenty

years that these patents were in effect,

GMCC was not just leaning on its patent

exclusivity; it was cultivating its brand,

honing its supply chain efficiencies, and

generally maintaining its dominance due to

having the first mover advantage.[...]

particularly...perfecting the manufacturing

of these cups." - Ali Sternburg

Keurig Case – K-cup

Green Mountain

Coffee Roasters

1997 Revenue - $43 million

2014 Revenue - $4,710 million

========================

5-year Annual Revenue Growth

53%

========================

1997 Net Income - $1.5 million

2014 Net Income - $596 million

¿What happened?

Keurig Vue (end of 2013)

Keurig Rivo (2015)

Keurig – Oops!

Launch of Keurig 2.0

Philips vs. all others Mission:

What is Philip’s mission?

What is Keurig’s mission?

What is Nestle’s mission?

Pricing:

Keurig / cup?

Nestle / cup?

Senseo / cup?

PHILIPS VS. KEURIG

Fiv

e F

orc

es M

od

el

Complementors

Philips is making choices

Choose to leave the USA

Choose to sell Senseo to Douwe Egberts

Jacobs (formerly Kraft) +

Douwe Egberts (formerly Sara Lee)

Strategic decisions….Appeals to Europeans

• Small size of coffee cup (espresso based)

• Limited variety (no flavors or brands)

• Well-known and respected brand

But…. The American Single-Serve market is too big to

ignore:

• US Coffee Market Total: $19 billion (20% of global)

• (Keurig - $4.7 billion)

Single serve pods account for 41.2% of dollar sales of ground

coffee in the US

By Elaine WATSON, 23-Apr-2014

More than four out of every 10 dollars spent on ground coffee in

the US is now spent on single-serve pods such as K-Cups,

according to the latest Nielsen data.

http://www.foodnavigator-usa.com/Markets/Single-serve-pods-account-for-41.2-of-dollar-sales-of-ground-coffee-in-the-US

http://www.fool.com/investing/general/2014/02/16/keurig-20-may-warm-things-up-for-green-mountain.aspx

Strategic decisions….

Appeals to Americans:

• Large Size of coffee cup (non-espresso based)

• Variety of Flavors / Types / Brands

• Unknown brand

Keurig’s Dominance of the US Market*:

• 16% of homes have a Keurig Single-

Serve Brewer (SSB) **

• A goal of 25% by 2020

• Keurig SSB Market Share: 72%

• Nespresso SSB Market Share: 3%

* http://www.marketplace.org/topics/business/single-serve-coffeemaker-market-heats (April 9, 2014)

** http://seekingalpha.com/article/2856736-in-mature-markets-innovation-is-key-for-keurig-green-

mountain?auth_param=12tsg6:1ach61a:4ed18851c700ef9e378be851cacb35f3&uprof=14&dr=1 (January 28, 2015)

Nestle Nespresso

Global ‘Capsule’ Sales in 2013:

$10.8 billion

Nestle share: almost 33% ($3.5 billion)

“Nestlé Loses a Clash Over Single-Serve Coffee”

Case brought in French court by Douwe Egberts /

Senseo regarding unfair competitive practices

France accounts for 25% of Nespresso sales

($0.9 billion)

French courts ruled that any measures that Nestle

takes to limit other manufacturers from producing

coffee for its machines is not legal.

Founded 2006

Has sold and given away 20 million shoes

Least expensive shoe is $54

Total sales over $1 billion

August 2014 –

Bain Capital acquires 50% at a valuation of

$625 million

“The ethical shoe company is valued at $625m

despite selling a relatively dull product and giving

half its stock away”

Expansion of concept

2011 – Sunglasses ($98 - $189)

(for every pair purchased, Toms

will help give sight to a person in

need)

2014 – Coffee ($13 for 350 grams)

(each bag of coffee beans = clean

water for a week /

each cup of coffee = clean water

for a day)