Introduction to Strategic Management

Transcription

1 Introduction to Strategic Management Session 4 Business strategy, strategic capabilities and competitive advantage Jens Schmidt

2 I. Why are some companies more successful than others?

3 Operating profit per employee among European airlines (2012) Low-cost airlines Source: Centre for Aviation, European airline labour productivity: CAPA rankings (2012 data)

4 Mobile phone market shares and profits Big differences in profitability within the same industry and change in distribution of profits over time

5 Why is Apple so much more successful than other mobile phone manufacturers?

6 Decomposing company performance and implications for strategy Sources of performance Managers problem Key questions Average industry performance Choose an attractive industry What makes an industry attractive (Five Forces)? Opportunities and threats Company performance + Performance relative to competitors Choose a different strategy than competitors What strategic capabilities are the basis for outperforming competitors? Strengths and weaknesses

7 II. Generic strategies and competitive advantage

8 Porter s generic strategies: Low cost vs. differentiation Competitive advantage Lower cost differentiation Cost leadership Cost focus Differentiation Differentiation focus Stuck in the middle Not choosing one of the four strategies will be punished by low performance (but is that true?)

9 In the news: Competitive scope in the mutual fund industry strong competition from low-cost companies niche focus (differentiate) broad scope (exploit scale) stuck in the middle?

10 Achieving competitive advantage (withstanding the forces of competition) Customer willingness to pay Price charged to customer Price paid to suppliers (costs) Costs of suppliers Net value experienced by customer Firm margin (profit) Supplier profit Differentiation advantage Cost advantage Better product/service (e.g. higher quality) than competitors - Allows charging a premium price Lower costs than competitors for doing the same thing - Allows undercutting price of competitors

11 How to achieve a cost advantage Lower input costs Economies of scale Learning curve Product or business model design Economies of scale (exploit fixed costs) Experience curve (accumulate learning)

12 How to achieve a differentiation advantage Target distinct customer segment(s) with better (higherquality or higher-performance) product/service than competitors Vertical differentiation More is better, but also costs more Horizontal differentiation Some like it red, some like it blue vs. vs.

13 What generic strategy do these companies follow?

14 Achieving competitive advantage involves trade-offs high Trade-off: Improving cost position typically requires reducing value to customers Value delivered to customers Productivity frontier (best practice) Trade-off: Increasing value to customers typically requires increasing costs low high Relative cost position low

15 Lufthansa facing trade-offs

16 Cost or differentiation advantage? Or both? It may not always be so clear

17 Who are the target customers? no. of customers Possible distributions of customers willingness to pay Industries contain multiple segments There may be one or more performance dimensions that are relevant for meaningful segmentation There may be more or less than three distinct segments (division into lowrange, mid-range, premium is one possible way) In order to create competitive advantage in a particular segment, a company needs to have appropriate strategic capabilities Capabilities that support a low-cost model should work better in the low- and mid-range, whereas differentiation works better in the mid-range to premium segment low-range mid-range premium Note that the relative size of segments often changes over time in an industry

18 Applying generic strategies to Finnish grocery retail Do you think this is accurate? Is there a cost leader? A differentiator? Is anybody stuck in the middle? low-range mid-range premium

19 Beyond generic strategies: Customers, capabilities and dynamics Cost leadership and differentiation strategies alone often don t capture the essence of a company s competitive advantage Three additional considerations are important: The company s customers and why they prefer buying the company s product or service (benefits vs. price) The strategic capabilities that underlie the competitive advantage, which are embedded in the business model The dynamics of competitive advantage Sustainability: will customer preferences change or will customers switch to competitors offering? Extendability: can the company attract a larger number of customers with its current strategic capabilities and competitive advantage?

20 III. Strategic capabilities and the business model

21 The business model Products, services and customers Range of products and customer needs addressed Revenue logic and customer relationships Synergies between products and services Operations Set of activities and capabilities Location of operations Scope (in-house vs. outsourced) Sales, marketing & distribution Type of customer Channels Brands New product development Role and importance of product development and R&D Technologies mastered and needed

22 Vertical integration Vertical integration: Entering into activities where the company is its own supplier or customers Supplier Operations Distribution, service Backward integration Forward integration Outsourcing as vertical disintegration: Subcontracting activities previously performed in-house to external suppliers

23 What is Zara s business model?

24 What is Zara s competitive strategy? Does it have a competitive advantage?

25 Types of strategic capabilities Resource Competence Dynamic capability The inputs that firms use to create goods and services what we have Undifferentiated or firm-specific Tangible or intangible (e.g. human resources, machines, brands, patents, ) A firm s skill in using its resources to create goods and services what we do well The combination of processes, procedures and expertise A firm s ability in renewing its resources and competences to address threats and opportunities in the environment Processes that allow for sensing, seizing and reconfiguring Basis for current business model Threshold capability Minimum necessary to achieve competitive parity (Largely dictated by industry and competitive characteristics) vs. Distinctive capability Capabilities that underlie competitive advantage: VRIO criteria Business model change, renewal, expansion and extension

26 Criteria for strategic capabilities: The VRIO* framework Value Is the resource or competence (or the products based on it) valued by customers, and does it enable a firm to respond to environmental threats and opportunities? Inimitability Is it very difficult or costly (or even impossible) for competitors to imitate, replicate or substitute the resource or capability? Rareness How many (actual or potential) competitors possess the same or similar valuable resource or capability, or a resource or capability that can be used for the same purpose? Organizational support* Is the company properly organized to support and exploit the resource or capability? Creating competitive advantage Sustaining competitive advantage *The 9th edition of the course book talks about VRIN resources, where N stands for non-substitutability

27 What are Zara s threshold and distinctive capabilities?

28 Comparing competitors company opera.ng revenues margin opera.ng profit market cap P/E ra.o stores Inditex 20,9 17,9% 3,7 101,7 34, H&M 23,3 14,9% 3,5 39,3 21, TJX Companies 28,1 12,0% 3,4 45,2 21, The Gap Inc 14,4 9,7% 1,4 8,0 12, data (market capitalization and P/E ratio Oct ) P/E ratio = market capitalization / net profit

29 Dynamic capabilities Dynamic capability: ability to renew and recreate strategic capabilities to meet the needs of a changing environment Sensing opportunities and threats Seizing opportunities Re-configuring capabilities What does this mean? This is SWOT in action! Some examples: Product development: developing new products/services and new capabilities Internationalization and market entry Mergers and acquisitions: acquiring new capabilities We will discuss some of these in more detail in later lectures

30 What are Zara s dynamic capabilities?

31 Alternatives for mapping business models: Porter s value chain

32 Alternatives for mapping business models: Activity systems

33 Alternatives for mapping business models: The business model canvas

34 Business models, strategic capabilities and competitive advantage Mapping the business models helps identify the sources of competitive advantage A company s strategic capabilities can be embedded in its business model Threshold vs. distinctive capabilities The value chain, activity systems and business model canvas are alternative frameworks for mapping a company s business model

35 Analyzing business model and diagnosing sources of competitive advantage Understand and model a company s business model The four elements Value chain, activity systems or business model canvas Diagnosing underlying strategic capabilities Threshold vs. distinctive capabilities VRIO criteria Understanding competitive position and dynamics Type of advantage: Cost vs. differentiation advantage and underlying capabilities Dynamic capabilities: renewing and extending the business model and developing/acquiring new capabilities

36 Homework (as preparation for next session) Read the document on Philips corporate strategy on the website under Materials : Think about the following questions: What are the changes to Philips business portfolio? What is the rationale behind these changes?