What is Strategy
• Actions and/or business approaches to gain sustainable competitive advantages and to achieve superior profitability • Two basic types of competitive advantages o Cost advantage (same value at lower cost) o Differentiation advantage (more benefits than competing products) • The resource-based view emphasizes on the utilization of resources and capabilities to form distinctive competencies which are the basis for achieving competitive advantages (http://www.quickmba.com/strategy/competitive-advantage/) Porter’s Generic Strategies • Porter’s generic strategies (http://www.quickmba.com/strategy/generic.shtml) o Cost leadership o Board differentiation o Focused low cost o Focused differentiation o Hybrid approach: the best cost strategy Advantage
Target Scope Low Cost Product Uniqueness
Board Differentiation Board (Industry Wide) Cost Leadership Strategy Strategy
Focused Differentiation Narrow (Market Segment) Focused Low-Cost Strategy Strategy Examples of Strategic Actions
• To acquire or upgrade crucial resources and capabilities • To gain bargaining power over suppliers and distributors • To gain market share through lower prices based on lower costs • To form strategic alliances/collaborative partnerships • To acquire or merge with other companies • To capture new market opportunities • To enter new product or geographic markets • To exit existing markets Business Model • Business model describes how the strategy will create value for customers and generate sufficient revenues to realize a profit • Business model consists of two components o Customer value proposition – how to satisfy customers need at a price customers will consider a good value o Profit formula – describe the cost structure
Customer value (V)
Product price (P)
Per-unit cost (C) Tests of Winning Strategies
• The fit test o External (w.r.t. business environment and market conditions) and internal (whether the strategy can be operated in a competent manner) o Dynamic (evolve as external and internal conditions change) • The competitive advantage test o Able to achieve a sustainable competitive advantage • The performance test o Competitive strength and market standing o Profitability and financial strength Strategy Making, Planning Process
1. Develop/Understand the vision, mission, and core values 2. Set objectives 3. Analyze the environments (external and internal) 4. Formulate strategies to achieve the set objectives 5. Implement the strategies 6. Monitor, control, evaluate, and adjust http://www.quickmba.com/strategy/strategic-planning/ Vision, Mission and Core Values 1/3
• Vision – where we want to go o Provide a clear picture of forward-looking directions o Be concise and easy to memorize o Be focused but flexible o Be feasible and make good business sense § Google: “to organize the world’s information and make it universally accessible and useful” § Dell: “To be the most successful computer company in the world at delivering the best customer experience in markets we serve” http://www.quickmba.com/strategy/vision/ Vision, Mission and Core Values 2/3
• Mission – Who we are, what we do and why we are here (scope and purpose) o Purely descriptive o Identify products/services o Specify buyer needs and markets o Define company identity § Facebook: “to give people the power to share and make the world more open and connected” § Microsoft: “To empower every person and every organization on the planet to achieve more.” http://www.quickmba.com/strategy/vision/ Vision, Mission and Core Values 3/3
• Core values – Beliefs, distinguishing characters and behavioral norms that should guide the pursuit of the strategic vision and mission
http://www.quickmba.com/strategy/vision/ Set Objectives • Performance targets It is important to strike a • A top-down process balance between financial • Charateristics of good objectives objectives and strategic o Specific objectives. The most widely o Quantifiable adopted framework to o Challenging achieve this is Balanced o With a deadline for achievement Scorecard • Two types of objectives o Financial objectives – financial performance target management § An increase in annual revenues by x percent o Strategic objectives – market standing, competitive position, and future business prospects § Increase market share to x percent by the end of the fiscal year Strategic Analysis and Strategy Formulation 1/3
Strategic Analysis
External Environment Internal Environment
PEST Boston Matrix Porter’s Five Forces SWOT Strategic Analysis and Strategy Formulation 2/3
• Strategic analysis • Analyze the external macro-environment – PEST (PESTEL adds the consideration of environmental and legal factors) (http://www.quickmba.com/strategy/pest/) • Analyze the strength of competition within the relevant industry – Porter’s Five Forces (http://www.quickmba.com/strategy/porter.shtml) • Analyze the company’s internal environment § Resource and capability analysis § SWOT (http://www.quickmba.com/strategy/swot/) § Value chain analysis (http://www.quickmba.com/strategy/value-chain/) § Benchmarking § Competitive strength assessment Strategic Analysis and Strategy Formulation 3/3
• Strategic Formulation • Porter’s generic strategies (http://www.quickmba.com/strategy/generic.shtml) • Hierarchical levels of strategies (http://www.quickmba.com/strategy/levels/) § Corporate – selection of businesses § Business unit – developing and sustaining the competitive advantage for the goods produced and services provided by the unit § Functional or departmental – business processes and value chain Strategy formulation is an inclusive collaborative activities involving management in all levels PEST Analysis 1/7 • Overview • Analyze the external macro-environment to identify factors that could have an impact on the organization’s operations • The factors included in the PEST analysis should • Be beyond the organization’s control • Have impacts on the organization’s operations • PEST analysis is used when • selling into a new countries/regions • launching new products/services • exploring a new route to market (i.e how to sell products and plan for sales) • Focus in identifying rather than resolving • There are other variations (e.g. PESTLE, ETPS, STEP, STEPLE, …, etc) PEST Analysis 2/7
• Process • Brian storm to list key issues • Identify the listed issues’ implications • Evaluate the likelihood of occurrence of each issue • Evaluate the consequences • Rank the issues with respect to importance PEST Analysis 3/7
• Political Factors (P) • Political policy/situation changes • Government stability, leadership, bureaucracy issues and corruption levels • Stability of neighbours • Employment and operational laws • Environmental regulations • Tax regulations • Trade restrictions/reforms • Health and safety requirements PEST Analysis 4/7
• Economic Factors (P) • Economic changes • Inflation (e.g. inflation is rising implies adverse effects on pricing/consumer’s purchasing power) • Taxes and duties • Exchange rates • Excise duties • Globalization • GDP/GNP • Finance & credit • Working practices • Cost of living PEST Analysis 5/7
• Social Factors (P) • Social factors • Population growth rate • Age distribution • Income statistics • Employment levels • Education and career trends • Cultural and social conventions • Religious PEST Analysis 6/7
• Technological Factors (P) • Technological factors (provides opportunities to gain market share and competitive advantages) • R&D • Automation • Technology incentives • Rate of changes • Education and career trends • Patent and licenses • Knowledge management systems PEST Analysis 7/7
• Examples of PEST (PESTEL) analysis: https://businessteacher.org/pestel/ • The PEST factors together with micro-environment factors/internal drivers provides the threats and opportunities in SWOT. Porter’s Five Forces 1/7 • Overview • Porter’s five forces analysis is to gain competitor intelligence • Known competitors + new competitors (new entrants) and new technologies • PEST + Porter’s five forces => External environment assessment • The model uses five key forces to identify and evaluate potential opportunities and risks: • Competitive rivalry • Threat of substitutes • Threat of new entrants • Buyer’s power • Supplier’s power • There are three steps • For each force, identify the parties involved together with the relevant factors • Evaluate the strength (high, moderate, or weak) of the pressures from each of the five forces Porter’s Five Forces 2/7 Porter’s Five Forces 3/7 Threat of New Entrants
Rivalry
Rivalry pressure increases when • Industry members have excess supply (e.g. too much inventory, over production capacity) • Industry members have high fixed/storage costs • Products are commodities or are weakly differentiated Buyer Supplier • Buyer demands are declining or growing slowly power • Switch costs are low power • Competitors are numerous and are more or less equal in size and competitive strength • Competitors are divers (in terms of strategies, objectives, and countries of origin) • Exit barriers are high
Rivalry pressure decreases when the above are in the opposite direction
Threat of substitute products or services Porter’s Five Forces 4/7
• New entrants • Potential new entrants may be lower due to barriers to entry created by • Governments • Asset specificity (e.g. investment in highly specialized equipment) • Patent and proprietary knowledge • Internal economies of scale (measured by the so called Minimum Efficient Scale (“MES”) which is the lowest point where the organization can produce so that its long run average costs are minimized; the higher the MES, the higher the barriers to entry) Porter’s Five Forces 5/7
• Threat of Substitutes • A substitute is a product from another industry that offers consumers benefits similar to those products provided by the organization within the industry (e.g. online news vs newspaper) • Threat of substitutes are high when • Switching costs are low • Substitute is cheaper or provide equal/superior quality/performance • Threat of substitutes are low when • Switching costs are high • Substitute is more expensive, are of inferior quality/performance • Substitute does not exist Porter’s Five Forces 6/7
• Supplier’s Power • Supplier’s power is high when • There are few suppliers but many buyers • Cost of switching supplier is high • Supplier’s product is highly differentiated and critical to end products • Substitute of supplier’s product is not available • The buyer is not price sensitive • The buyer does not represent a large portion of the supplier’s sales • Forward integration is possible Porter’s Five Forces 7/7
• Buyer’s Power • Buyer’s power is high when • Customers are price sensitive • Cost of switching for customer is low • Customers are well informed about the product • Low product differentiation • Customers purchase makes up a large portion of seller sales • Backward integration is possible SWOT Analysis
• Overview • SWOT stands for strength, weakness, opportunities, and threats where strength and weakness are considered to be internal factors while opportunities and threats are considered to be external factors • SWOTs depends on the business objectives under consideration • Two simple methods to apply the SWOT results to formulate strategies: • Matching: Match strengths to opportunities to gain competitive advantages • Converting: Convert threats or weaknesses into strengths or opportunities BOSTON Matrix https://www.youtube.com/watch?v=Uuuxs9gO8C Starbucks Hong Kong – Background Information
• The retail coffee and snacks store industry / food and beverage industry • General trends of the industry: Overview of the industry • Market share: Compare Starbucks with competitors • Demand and profitability drivers: Disposable income, prices, culture and attitudes Starbucks Hong Kong – PEST (External Analysis)
• Political Factors • No major changes to the legal system after the handover • Still common law based • Economic Factors • Asia’s major financial center • Many visitors form other countries especially from the mainland • Willing to spend for Starbucks? • Social-Cultural Factors • Interpersonal skills highly valued • Trend not to plan ahead for purchases • Loyal to a brand once trust has been established Starbucks Hong Kong – PEST (External Analysis)
• Technological Factors • Most people are technological capable • Good technological infrastructure
• Analysis • Favorable conditions for western companies like Starbuck • May formulate strategies in leveraging the technological environment (how?) Starbucks Hong Kong – PEST (External Analysis)
• Technological Factors • Most people are technological capable • Good technological infrastructure
• Analysis • Favorable conditions for western companies like Starbuck • May formulate strategies in leveraging the technological environment (how?) Starbucks Hong Kong – Porter’s Five Forces Analysis (Industry)
THREAT OF NEW ENTRANTS: Moderate • Barriers to entry: Not considered to be high (many existing competitors, localized small shops) • Brand identity: Strong brand identity • Capital requirements: Considered to be moderate • Absolute cost advantages: learning curve advantages exist • Switching costs: Essentially none
SUPPLIER POWER: Low to moderate BUYER POWER: Low to moderate • Switching costs of suppliers and firms in the • Buyer volume: Large number of individual industry: Relatively low to moderate as buyers with low volume purchases inputs are standard coffee beans • Buyer switching costs relative to firm • Presence of substitute inputs: Available RIVALRY: High to Moderate switching costs: Essentially none • Threat of forward integration with respect to • Industry growth: Market is mature with slow • Buyer information: Open threat of backward integration by firms in growth rate • Substitute products availability: Many the industry: Backward integration through • Intermittent overcapacity: No • Price sensitivity: Price related to quality direct purchase agreement and the • Product differences: Differentiation with • Brand identity: Strong establishment of coffee roasting plants. products and services Forward integration through retail stores • Brand identity: Strong brand identity • Switching costs: None
THREAT OF SUBSTITUTE PRODDUCTS OR SERVICES: High • Many alternative possible substitutions (e.g. tea, cocktails, soda, …, etc) • Essentially no switching cost • Much cheaper to make one’s own coffee • Countermeasures possible? Starbucks Hong Kong – SWOT (Internal Analysis)
• Strength • Strong brand identity and market shares • Diverse and high quality products • Store locations and decorations • Strong team building and HR management • Social responsibilities • Good mobile applications and established customer loyalty program • Weaknesses • Expensive • Too many outlets • Stereotype of large corporation Starbucks Hong Kong – SWOT (Internal Analysis)
• Opportunities • Diversify products and expand into retail operation • Further enhancement of the existing mobile and technological applications • Threats • Increased competition • Market saturation • Price volatility Starbucks Hong Kong – Value Chain Analysis
Primary Activities Inbound logistics Select beans and perform roasting Operations Has both retail and licensed stores Outbound logistics Little presence of intermediaries Marketing and Sales Achieve mainly through good quality
Service Provide unique Starbucks experience Support Activities Infrastructure Well-established infrastructure to support the business HR Management Well known for good HK management Technology Well known in using technology for management and services Procurment Form good strategic partnerships with suppliers Starbucks Hong Kong – Strategies
• Offer diversity • Use hedging strategies to deal with price volatilities • Further development in the retail sector
Reference: https://scholar.harvard.edu/files/nithingeereddy/files/starbucks_case_analys is.pdf