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

3

“BIG IDEAS”

• If you don’t know why (purpose) you’re in business, you won’t know what to do or how to do it

• If you don’t know where you’re going, you don’t know when you arrive

• You make tradeoffs and choose what NOT to do• To work, activities (execution of strategy) must fit

together and reinforce each other

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

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

ORGANIZATION STRATEGICCHOICES ENVIRONMENT

RESOURCES &CAPABILITIES

Need to understand Industry economics

and competitive environment

Strategy and Environment Linkage

New StrategyMust Fit

Porter:Generic Strategies

and 5 ForcesBCST 3800

Generic Strategies

• Porter describes strategy as actions that create defendable positions.Defensive:• Take market structure as given• match its strengths and weaknessesOffensive: • 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.

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 scope2. Product Differentiation3. Capital Requirements4. Patents and the Learning Curve5. Access to distribution channels6. 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

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

DISCUSSION

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