BLEMBA11_29111438_Andreas Nataniel - Integrated Paper RevPA6

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School of Business & ManagementInstitut Teknologi Bandung

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Name Andreas Nataniel

StudentID

29111438Mobilephone

+62 815 190 44548

Course code and

title MM5012 Business StrategyCourse time andplace

08.00 17.00 SBM ITB JakartaProgram

Business LeadershipExecutive

Lecturer

Dr. Ir. Mohammad Hamsal, MSE, MQM, MBA Amol Titus, MBA

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Duedate

March 9th , 2013

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Integrated Paper

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Integrated paper from session 1 session 15.

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1 Introduction to Strategic Management

Strategy is an integrated and coordinated set of commitments and actions designed to exploit corecompetencies and gain a competitive advantage (Ireland et al. 2011). So what is strategy? Based on

my understanding from the class, strategy is a set of action below:

1. Positioning an organization for competitive advantage

2. Deciding what to do and what NOT to do (making choices of Who What How)

3. Creating value for shareholders and other stakeholders by providing value to customers

Thus, the main and primary goal of business strategy is to achieve a sustainable competitive

advantage (SCA). Competitive advantage can be achieved if the firm implements strategy that

competitors are unable to duplicate or find too costly to imitate. To create a sustainable and

competitive advantage, a firm must create value to its customer. Then, a strategy must be built

based on few parameters (Henry 2011):

Who should the company target as customers?

Whatproducts or services should the company offer the targeted customers?

How can the company do this efficiently?

To define a good strategy, the firm needs to consider the components inside and outside the firm

itself. These elements are:

Vision statement: represents a desired state that the organization aspires to achieve in the future.

Mission statement: seeks to answer the question why an organization exists.

Values statement: organizations essential and enduring tenets which will not be compromised

for financial expediency and short-term gains.

Key success factors: elements in the industry which keep customers loyal and allow the

organization to compete successfully.

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Operating goals & metrics: tools for measurement and guidance in day-to-day activities.

Strategic leaders: a firm needs to have a leader who can inspire his team to achieve goal and

behave according to firms values.

In practice, there are 3 forms of strategy depend on the level impacted (Henry 2011):

Corporate strategy is concerned with what industries the organization wants to compete in.

Business strategy or competitive strategy deals with how an organization is going to compete

within a particular industry or market.

Functional strategy deals with decisions according to functional lines such as R&D and finance.

There are 5 indicators to show that the firm has a good strategy or not. These indicators are:

There is a unique value proposition compared to competitors

A different and tailored value chain

Clear trade-off and choosing what to do & not to do

Activities that fit together and reinforce each other

Continuity of strategy with continual improvement in realization

If the organization succeeds to implement a good strategy, it will result in above average returns. It

is a return in excess of what investor expects in comparison to other investments with similar risk.

2 Strategy Diamond Model

In selection of strategy, it should focus on arena, vehicle, differentiator, staging and economic

logic. These are called Strategy Diamond Model(Hambrick, et al, 2001). For more information on

Strategy Diamond Model, please refer to Exhibit 1.

One thing to remember, when defining a strategy, it needs to be backed up with high level data to

give a clear direction on where to drive the strategy. Detailed data analysis can be done on the next

step, a business plan phase. Overall, the right flow is defining strategy choosing the right

business model detailing the business plan (operation plan, sales & marketing plan,

production plan, logistic plan, financial plan, etc usually short term in yearly basis).

3 Business Model Development

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A business model is a reflection of the firms realized strategy (Casadesus-Masanell et al, 2010). By

definition, business model is a framework by which firm can generate profits. So what is the

relationship between strategy & business model? What differentiates strategy compare to business

model? Strategy is all about how to beat the competition while business model is about how to

generate profits. When defining a business model, the firm must consider how to create value to

customers (value creation) and how the value can generate reward for the firm (value capture).

Looking at business model, there are 4 elements of business model creation (Johnson et al, 2008):

Customer value proposition (CVP): A successful company is one that has found a way to

create value for customers that is, a way to help customers get an important job done.

Profit formula: The profit formula is the blueprint th at defines how the company

creates value for itself whileproviding value to the custome r.

Key resources: The key resou rces are assets such as the peopl e, technol ogy, product s,

facilitie s,equipmen t,channel s, and brand requi red to deliverthe value proposition to

the targeted custome r.

Key processes: Successfu l companie s have ope rational and manageria l processes that

allow the m to delivervalue in a way they can successfull y repeat and increas e in scale.

Business model refers to the logic of the firm, the way it operates and how it creates value for its

stakeholders and Strategy refers to the choice of business model through which the firm will

compete in the marketplace; while Tactics refers to the residual choices open to a firm by virtue of

the business model it chooses to employ. The relationship between strategy, business model and

tactics are shown in below figure.

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4 Exploring General & Competitive Environment

To keep sustainably competitive in the market, the organization needs to consider factors from

external environment. These factors could come from political, economical, social and

technological angle. Looking at the industry in specific, there are also external factors such as new

entrants, power of buyers, substitute products, power of suppliers and competitive rivalry as

mentioned in Porters Five Forces Framework.

When looking at the general environment, the organization is trying to identify the possible changes

due to factors from outside the industry but can affect business activities. Organization needs to

continuously scan and monitor their general environment to identify signals that can affect the

industry. Some tools that can help organization to analyze the general environment (Henry 2011):

1. Scenario planning

There are 5 steps in defining the scenario planning: identify key focal issue, identify the driving

forces around this issue, develop scenarios based on the most important driving forces,

describe implications for each scenario and identify early warning signals for each possible

scenario.

There are some limitations for this approach. It is very subjective and highly dependent to

managers inside the organization. Thus, the accuracy of the scenarios remains questionable.

2. PESTLE analysis

Organizations approaches to analyze the general environment from Political, Economic,

Social, Technological,LegalandEnvironmentalaspects (PESTLE). There are some limitations

on this approach. There should be some implications associated with organizations

environment and the rate of changes or uncertainties are limiting the use of this analysis alone.

3. SWOT analysis

This analysis is referring to strengths and weaknesses from internal while opportunities and

threats from external. Later on in this section, we will see some limitations on this approach.

When looking at the competitive environment, the organization is trying to identify the factors

inside the industry and how to achieve competitive advantage. Some usable tools are (Henry 2011):

1. Porters Five Forces Framework: It is a tool to analyze the attractiveness of an industry based on

the strengths of five competitive forces. These 5 competitive forces are:

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Threat of new entrants. There are some barriers for a new entrant to enter the industry like

economies of scale, product differentiation, and capital requirements, switching costs,

access to distribution channels and cost advantages from competitor independent of size.

Bargaining power of buyers. Buyers (customers) are powerful when they purchase a large

portion from industrys output, purchased products account for a significant portion of

sellers annual revenues, they could switch to another product and there is no differentiation.

Bargaining power of suppliers. A supplier group is powerful when they are dominated by

few large companies, substitute product is not available, industry firm is not a significant

customer for supplier group, supplier goods are critical for buyers success, it has a high

switching cost, and supplier is a threat to integrate forward to buyers industry.

Threat of substitute products and services. Substituted products are strong threat when

customers face few switching costs, substitute product price is lower and substitute product

quality is equal or greater than the competing product.

Intense rivalry among competitors. Intensity of rivalry is strong when competitors are

numerous or equally balanced, it has a high fixed costs, lack of differentiation, competitors

have an extra capacity and competitors have high exit barriers.

2. Value Net. Value net represents a map of the competitive game, the players in the game and

their relationship to each other. By showing relationship of each player in the industry,

Brandenburger and Nalebuff (1995) introduce a new player called complementor. This could be

an addition to Porters 5 Forces Framework. This is shown in Exhibit 3.

3. Value Chain Analysis. Value chain analysis is one of the tools which can help to assess

organizations resources and in so doing determine its strengths and possible weaknesses. It

consists ofprimary activities andsupport activities like shown in Exhibit 4. Primary activities

are activities which are directly involved in the creation of a product or service. Support

activities are activities which ensure that the primary activities are carried out efficiently and

effectively.

An organization can start doing SWOT analysis after the audit of external and internal environment

have been completed. In formulating strategy, an organization should seek to match its strengths

and weaknesses to opportunities and threats. Some limitations of SWOT analysis (Henry 2011):

It produces very lengthy lists which can have the same weight. There is no prioritization.

Strengths and weaknesses cannot be translated directly to opportunities and threats.

Ambiguity same factor can be recognized as both strength and weakness at the same time.

The same factor can be also recognized as threat and opportunity at the same time

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The analysis may be too focused on industry boundary and miss signals from external which

can change the industry structure.

In the case of Movie Exhibition Industry, we can see that the external and competitive environment

is playing a significant role in the overall competition. The box-office revenue cannot be increased

due to lots of substitute products like home-theater, DVD etc. The exhibitors are trying very hard to

innovate further by increasing customer experiences which includes upgrading the facilities into 3D

and sound-proof technology, setting up lounges and entertainment centers inside the theater facility.

While in the case of Apple, their core competency is innovation. That is their value differentiation

and that what makes them sustainable and have competitive advantages compare to their

competitors. The culture to innovate inside Apple is something that is valuable, rare, costly to

imitate and for sure there is no substitute. These attributes are Apple differentiation.

5 Creating Business Level Strategy

Business level-strategy is an integrated and coordinated set of commitments and actions the firm

uses to gain a competitive advantage by exploiting core competencies in specific product

markets/industry (Ireland et al. 2011). Strategic competitiveness results only when the firm satisfies

a group of customers by using its competitive advantages as the basis for competing in individual

product markets. Effectively managing customer relationships helps the firm answer questions

related to the issue of who, what & how. As part of strategy formulation, Grant proposes a

framework which consists of five stages (Ireland et al. 2011):

1. Identify and classify organization resources. Emphasize on

strengths and identify opportunities for better resource

utilization.

2. Identify organizations capabilities. How it can do better than

competitors.

3. Identifying sustainable competitive advantage by emphasizing

on organization resources that are: valuable, rare, costly to

imitate and non-substitute.

4. Select a strategy which best exploits organizations resources

and capabilities.

5. Identify whether any resource gaps exist which need to be filled.

7

Strategy

CompetitiveAdv anta ge

Capabilities

Resources

Values

Rare

Costly toimitate

Non

Substitute


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The purpose of a business-level strategy is to create differences between the firms position and

those of its competitors. To position itself differently from competitors, a firm must decide whether

it intends toperform activities differently or toperform different activities (Ireland et al. 2011).

Firms choose from among several types of business-level strategies to establish and defend their

desired strategic position against competitors (Ireland et al. 2011):

1. Cost leadership: is an integrated set of actions taken to produce goods or services with features

that are acceptable to customers at the lowest cost, relative to that of competitors. For example

of value creating activities associated with cost leadership strategy see exhibit 6.

There are also competitive risks of this strategy. They are:

Innovations by competitors can quickly eliminate cost advantage

Too much focus on cost reduction versus competitive levels of differentiation

Competitors may learn how to successfully imitate a cost leaders strategy

2. Differentiation: is an integrated set of actions taken to produce goods or services (at an

acceptable cost) that customers perceive as being different in ways that are important to them.

For example of value creating activities associated with differentiation strategy see Exhibit 7.

There are also competitive risks of this strategy. They are:

Can charge too high of a price premium

Differentiation theme no longer valuable to customers

Over-differentiating. Customer experience shows differentiation not worth the cost

Counterfeiting

3. Focus Strategy: is an integrated set of actions taken to produce goods / services that serve the

needs of a particular competitive segment. It can be focus on cost or focus on differentiation.

The competitive risks of this strategy are:

competitor can out-focus the firm (competitor focuses on a more narrowly defined segment)

attract many competitors on the same attractive segments

Customers may decide that the cost of uniqueness is too great

Competitors may learn how to imitate Value Chain

The means of uniqueness may no longer be valued by customers

4. Integrated cost leadership / differentiation: strategy that involves engaging in primary and

support activities that allow a firm to simultaneously pursue low cost and differentiation. The

example of this firm is Singapore Airlines. This is contradicting with 5 forces of Porter whereasthere should be a tradeoff by choosing one strategy and loses competitive advantages on the

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others. 3 sources of flexibility that is useful for firms to executing dual strategy (cost reductions

and continuous enhancements):

Flexible manufacturing system: computer based process to produce a variety of products.

Information networks: using technology to link suppliers, distributors and customers. Total Quality Management (TQM) systems: emphasizes firms total commitment to the

customer and continuous improvement of every process through data driven, problem

solving approaches based on empowering employees.

There is also a possibility that firm executes dual strategy due to the product differentiation has no

more room to improve while the competition is becoming fierce. Thus, the firm needs to be aware

of the cost and starting to go into cost leadership strategy. The result is the firm will execute dual

strategies at the same time and getting stuck in the middle between dual strategies (cost structure is

not low enough for attractive pricing and product is not sufficiently differentiated enough to create

value for target customer).

6 Strategic Acquisition and Restructuring

One of the strategic moves in a business strategy is to acquire or to merge with another firm. A

merger is a strategy through which two firms agree to integrate their operations on a relatively co-

equal basis (Ireland et al. 2011). An acquisition is a strategy through which one firm buys a

controlling, or 100 percent, interest in another firm with the intent of making the acquired firm a

subsidiary business within its portfolio (Ireland et al. 2011). A takeover is a special type of

acquisition wherein the target firm does not solicit the acquiring firms bid; thus, takeovers are

unfriendly acquisitions (Ireland et al. 2011). Some reasons for a firm to do acquisitions:

Increased market power

Overcoming entry barriers

Cost of new product development and increased speed to market

Lower risk compared to developing new products

Increased diversification. Acquisitions are the easiest way to expand firms portfolio.

Reshaping the firms competitive scope. With acquisitions, a firm can reduce the effect of

rivalry and remove its dependencies on a single supplier. It will alter the market.

Learning and developing new capabilities

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Acquisitions can increase competitiveness and help firm achieving success. However, acquisition

also has its own problem. Below are some problems in achieving acquisition success (Ireland et al.

2011):

Integration difficulties: the most important determinant of shareholder value creation in M&A.

Inadequate evaluation of target: due diligence for acquirer to evaluate a target firm.

Large or extraordinary debt: High debt can have several negative effects on the firm.

Inability to achieve synergy: A firm ability to account for costs that are necessary to create

anticipated revenue and cost based synergies affects its effort to create private synergy.

Too much diversification: firms can become over-diversified.

Managers overly focused on acquisitions

Too large: The additional costs required to manage the larger firm will exceed the benefits of

the economies of scale and additional market power.

The reasons and its problem on achieving successful acquisitions are shown in Exhibit 8. There are

some attributes that the firm must have in order to have a successful acquisition. These attributes

are depicted in Exhibit 9.

While acquisition is more on the external, there is also an internal strategy that the firm can do to

increase its competitiveness. Restructuring is a strategy through which a firm changes its set of

businesses or its financial structure (Ireland et al. 2011). There are 3 types of restructuring strategies

(Ireland et al. 2011):

Downsizing: is a reduction in the number of a firms employees and sometimes in the number

of its operating units, but it may or may not change the composition of businesses in portfolio.

Down-scoping: refers to divestiture, spin-off, or some other means of eliminating businesses

that are unrelated to a firms core businesses.

Leveraged buyouts: is a restructuring strategy whereby a party (typically private equity firm)

buys a firms asset in order to take the firm private. Firms stock is no longer traded publicly.

Each of above alternatives can have its own short-term and long-term outcomes. For showing the

possible outcomes from these alternatives, we can refer to Exhibit 10.

7 Competitive Strategy & Strategic Alliance

Lets take for example PT. Telkom Tbk that has done a major transformation on 2008 - 2009. It has

completely transformed itself from being just a telecommunication provider to become a lean,

competitive and innovative multimedia enterprise. It is applying dual strategies which are cost

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leadership (by cutting down its personnel expense from 30,000 to 15,000 personnel) and technology

differentiation (by diversifying its portfolio which complement its core business). One proof point

of this differentiation by diversification is shown in Telkom recent subsidiaries in multimedia

domains in Exhibit 11.

A different strategy has been done by Honda where it is focusing on innovation. It allows R&D

employees to be creative and come up with a new idea even if the idea is not complementing its

core business. This differentiation in R&D innovation also has its own problems. Thats why along

the way, Honda restructured its project approach by still using R&D as innovation engine but when

it comes to execution, they give the mandate to business unit. In this case you can see

differentiation strategy supported by internal restructurization.

8 Lesson Learned

Strategy is sometimes missed-interpret by most of the people. They use the jargon strategy to

emphasize how important the message that they are trying to relay. However with this course, I

learned that strategy is not just some fancy keyword, it a whole set of activities that initiate a

business. It sets a direction of where to go for organization. It chooses which business model that

the organization should use. It defines the tactics to run the chosen business model.

I learned from this course that the organization needs a strategy in order to be competitive in the

market. As mentioned in above passage that the main purpose of business strategy is to achieve a

sustainable competitive advantage (SCA). Based on my observation in case studies and discussions,

product innovation sustains less than process innovation since product is easily imitated compare to

process. To define a strategy, an organization should first look into arena, vehicle, differentiators,

staging and economic logic. These are what they called as Strategy Diamond Model.

When defining a strategy, the organization should first consider external & internal environments.

There are several tools that can be used for analyzing general environment such as scenario

planning, PESTLE analysis & SWOT analysis. Looking deeper into the industry itself, the

organization should also analyze its competitive environment. For this, we can use tools such as

Porters 5 Forces Framework, Value Net and Value Chain Analysis.

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Internally, the organization must understand its resources and its core competencies first as

competitive advantages (values, rare, costly to imitate and non-substitute). Organization can then

choose toperform activities differently or toperform different activities. There are several types of

business level strategies that the organization can choose like cost leadership, differentiation

strategy, focused strategy and integrated strategy. Organization can choose dual strategies like cost

leadership and differentiation. Other strategies like merger, acquisitions, take-over and restructuring

are worth considering for achieving sustainable competitive advantage.

After defining a strategy, an organization can start choosing the right business model. The business

model creation itself has four important elements. They are value propositions, profit formula, key

resources and key processes. These elements are the tools for business model creation.

Finally, I learned that all of those tools mentioned above are very useful to help us defining a

strategy in order to remain competitive. These tools need to be used together and to complement

each other, not to be used alone. Each tool has its own benefits and limitations. By combining all

tools together, the organization can have a full visibility for defining a strategy. At the end of the

day, the main objective is to achievesustainable competitive advantage (SCA).

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Exhibit 1. Strategy Diamond Model

Exhibit 2. Porters Five Forces Framework

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Exhibit 3. The Value Net

Exhibit 4. The Value Creating Activities

Exhibit 5. Five Business-Level Strategies

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Exhibit 6. Examples of Value Creating Activities Associated with the Cost Leadership

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Exhibit 7. Examples of Value Creating Activities Associated with the Differentiation Strategy

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Exhibit 8. Reasons for Acquisitions and Problems in Achieving Success

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Exhibit 9. Attributes of Successful Acquisitions

Attributes Results

1. Acquired firm has assets or resources that are

complementary to the acquiring firm's core

business

1. High probability of synergy and

competitive advantage by maintaining

strengths

2. Acquisition is friendly2. Faster and more effective integration an

possibly lower premiums

3. Acquiring firm conducts effective due diligence

to select target firms and evaluate the target firm's

health (financial, cultural and human resources)

3. Firms with strongest complementarities are

acquired and overpayment is avoided

4. Acquiring firm has financial slack (cash ir a

favorable debt position)

4. Financing (debt or equity) is easier and less

costly to obtain

5. Merged firm maintains low to moderate debt

position

5. Lower financing cost, lower risk (e.g. of

bankruptcy) and avoidance of trade-offs that

are associated with high debt

6. Acquiring firm has sustained and consistent

emphasis on R&D and innovation

6. Maintain long-term competitive advantage

in markets.

7. Acquiring firm manages change well and is

flexible and adaptable

7. Faster and more effective integration

facilitates achievement of synergy

Exhibit 10. Restructuring and Outcomes

Exhibit 11. PT Telkom Tbk and Subsidiaries.

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References

Apple Inc.: Keeping the i in Innovation [Ireland et al. (2013), Case#2]

Casadesus-Masanell, R. & J. E. Ricart (2010). From Strategy to Business Models & onto

Tactics.Long Range Planning. 43.

Hambrick, D. C. & J. W. Fredrickson (2001). Are You Sure You Have a Strategy? Academy

of Management Executive. 15(4).

Henry, A. E. (2011). Understanding Strategic Management. 2nd Edition. Oxford University

Press.

Heracleous, L. & J. Wirtz (2010). Singapore Airlines Balancing Act. Harvard Business

Review. July-August.

Inside Hondas Brain [Fortune, March 17, 2008]

Ireland, R.D.; R.E. Hoskisson & M.A. Hitt (2011). The Management of Strategy: Concepts and

Cases. 9th Edition. South-Western Cengage Learning.

Johnson, M. W.; C. M. Christensen & H. Kagermann (2008). Reinventing Your Business

Model.Harvard Business Review. December.

PT Telkom Tbk [Globe Asia, September 2010]

The Movie Exhibition Industry: 2011 [Ireland et al. (2013), Case #19]

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