What Is Strategy

What is strategy

Executive summary of the Harvard business review

“Todays dynamic markets and technologies have called into question the sustainability of competitive advantage. Under Pressure to improve productivity, quality and speed, managers have embraced tools such as:

1. TQM total quality management
2. Benchmarking
3. Time based competition
4. Outsourcing
5. Partnering
6. Re-engineering
7. Change management

Dramatic operational improvements have resulted but rarely have these gains translated into sustainable profitability. And gradually the tools have taken the place of strategy. In this article Porter explores how that shift has led to the rise of mutually destructive competitive battles that damage the profitability of many companies. Porter argues that operational effectiveness, although necessary to superior performance, is not sufficient, because its techniques are easy to imitate. In contrast the essence of strategy is choosing a unique and valuable position rooted in systems of activities that are much more difficult to match. Porter thus traces the economic basis of competitive advantage down to the level of the specific activities a company performs. He shows  how making tradeoffs among activities is critical to the sustainability of a strategy (and the competitive advantage)”

What is strategy?

(1)Is the creation of an unique and valuable position over time, involving a different set of activities

Strategy and leadership are tied together

Is the plan of the company to achieve its goals

Is about alignment, making things clear in a company, to differentiate from others in the industry, to be profitable

Vocabulary:

• Operational effectiveness: performing activities better (creating, producing, selling and delivering). The problem is that best practices are easy emulated. Is necessary but not sufficient
• Productivity frontier: the maximum value a company can deliver at a given cost, given the best available technology, skills and management techniques and purchase inputs
• Competitive convergence: benchmarking effect, when companies adopt the improvements to get operational effectiveness
• Strategic positioning: attempts to achieve sustainable competitive advantage by preserving what is distinctive about a company. Performing different activities from rivals or similar activities in different ways. It has 3 key principles

• (1) strategic position emerges from 3 different sources:

1. Serving few needs of many customers (batteries MAC) variety based positioning
2. Serving extensive needs of few customers (Louis Vuitton) needs-based positioning
3. Serving extensive needs of many customers in a narrow market  (Cinecolombia?  Carmike cinemas) access based positioning

• Strategy requires you to make trade-offs in competing - to choose what not to do. Gains in one area can be achieved only at the expense of another area. Trade-offs are essential to strategy, they create the need for choice and limit what a company offers. Trade-offs arises because:

1. Avoid inconsistencies in image or reputation (you have to stick to your main value)
2. Activities themselves (a specific position requires tailored activities)
3. Limits on internal coordination and control, by choosing to compete in one way and not another, otherwise employees may have an unclear framework for decision making.

• Strategy involves creating “fit” among a company's activities. Fit has to do with the ways activities interact and reinforce one another. The most valuable fit is strategy-specific because it enhances a position uniqueness and amplifies trade-offs. Types of fit:
• First order fit is simple consistency between each activity (function) and  the overall strategy.   It ensures that the competitive advantage of activities cummulate and do not weak cancel themselves out. Ex: Vanguard, aligns all activities with its low cost strategy.
• Second order fit occurs when activities are reinforcing. Ex: Neutrogena soap in luxury hotels (medical and hotel marketing activities reinforce one another, lowering marketing costs), Bic corporation, goes beyond simple consistency with some marketing activities to stimulate impulse buying.
• Third order fit,  optimization of effort. Coordination and information exchange across activities to eliminate redundancy and minimize waste effort. Ex: Gap stocking   model

Questions you may answer to reconnect with strategy:

• Which of our products or service varieties are the most distinctive?
• Which of our product  or service varieties are the most profitable?
• Which of our customers are the most satisfied?
• Which customers, channels,, or purchase occasions are the most profitable?
• Which of the activities in our value chain are the most different and effective?

Generic strategies: cost leadership  (vanguard), cost differentiation (ej. Neutrogena), cost focus (ej. Ikea, southwest)

…………………………….

The five competitive forces that shape strategy

Industry structure is what makes harder or easy to companys to be profitable. A healthy industry structure it's as important as companies own position. Those forces is what help us to analyze the industry we are in. The point of industry analysis is to understand the support of competition and the root causes of profitability.Where does the company stand versus buyers, suppliers, entrants, rivals and substitutes.

The five competitive forces that shapes strategy

1. Established rivals, can initiate a price war….. When industry growth is slow, exit barriers are high, products are similar, product is perishable

Can be a positive sum or crease the average profitability when each competitor's aims to serve the needs of different customers segments, with different mixes of price  products, services, features or brand identities

1. Savvy customers can force down prices (price sensitivity), loyalty. They have bargaining power if:

1. Large volume buyers over industries with high fixed costs
2. Buyers can threaten to integrate a process to produce the industry product themselves. Ex: soft drinks companies control the power of packaging manufacturers
3. A buyer group is price sensitive if:

• The product it purchases from the industry represent a significant fraction of its costs or budget. More price sensitive
• Are paying for quality, less price sensitive
• Is kind of the same with customers, they tend to be more price sensitive if the product it's not undifferentiated, expensive relative to their incomes and when performance has limited consequences. Ex: paying for a watch or a surgery

1. Powerful suppliers, may constrain your profits if they charge higher prices.

1. Monopoly Ex: microsoft with its operating systems. A supplier group is powerful if:
2. Does not depend on one industry for its revenue
3. Industry participants face high switching costs
4. They have a differentiate product. Ex: pharmaceutical companies offering patented drugs rather than generic products. Have more power over health organizations.
5. There is not substitute

1. Aspiring entrants, have to look for the barriers (investment necessary to compete), new entrants can release existing capabilities and cash flows to shake up competition. Apple with itunes (music business, low prices). There are some barriers:

1. Supply-sider economies of scale, is the benefit of lower costs per unit because its large production volume.
2. Demand side benefits of scale, network effects  such as Apple community, so new entrants may fight for price until it builds up a large base of customers
3. Customer switching costs, are fixed costs that buyers faced when they change suppliers, ex: software has very high switching costs, because all the embedded data.
4. Capital requirements, the need to invest large financial resources in order to compete
5. Incumbency advantages independent of size. No matter the size incumbents may have costs or quality advantage not available to potential rivals. Ex: patents
6. Unequal access to distribution channels, sometimes access to distribution is so high a barrier that new entrants must bypass distribution channels altogether or create their own. Ex: low cost  airlines avoid travel agents thus encourage passengers to book their own flights on the internet.
7. Restrictive government policy, regulations can open or close entry into industries. Ex: taxis services, liquor, airlines

1. Substitute offering, if an industry does not distance itself from substitutes through product performance,, marketing or other means, it will suffer  in terms of profitability.

Strategies for enhancing your company's long term profits:

1. Position your company where the forces are weakest, ex: heavy truck maker, focus on individual drivers who own their own truck. Making it more comfortable and they are willing to pay. Trucks industry is weak (standard)
2. Exploit changes in the forces, ex itunes (digital music, buying it legal)
3. Reshape the forces in your favor. Supplier power by standardization of parts to make more easy switch among vendors. Customer power by expanding your services. Established rivals by investing in product or service differentiation. New entrants by elevating the fixed costs of competing, politic policy, (barriers). Substitutes by offering better value through wider product accessibility.

ROIC Return on invested capital, measure of profitability for strategy formulation, return on sales or the growth rate profits fail to account for the capital required to compete in the industry.

ROIC= EBIT / AVERAGE INVEST CAPITAL LESS EXCESS  CASH