Strategy Michael Porter 5 forces Model

(forces that shape competitive strategy at the business level)

1. Supplier: Bargaining power of the suppliersWorst Case:

Supplier controls full supply (no competition) Customer unimportant Ex: Jackson red boot

2. Customers: bargaining power of the customerWorst Case:

Ex: Wal-Mart with P&G and Gillette Customers cannot legally band together

3. Substitutes and new technology: threat of substitute productsResearch and Development

Example: Sugar – neutral sweet – splenda “ Do not, will not” High/low technology: percent of revenue spent on research and development Highest technology –pharmacy (Zimmer, bio-met and Depuy)

4. Barriers to Entry: risk of entry by potential competitionEx: Harley Davidson-blocked Yamaha and Honda

Strengthened 5. Competitors: rivalry among established firms

Best Case: Bausch and Lomb, contact provider Bought up of defected competitors

Majorly applies to “barriers to entry”Jack Trice, IOWA STATE

Are cars like rice? Bad position or a commodity?

15 minutes of fame = electric starter, radial tires, EFI, AIRBAGS, 0-60 MPH, defects (smaller margin)

Advantage is temporary

Cars are like rice, only if you let them be

C

10 Box Full Professional SWOT Model of the strategy process:5 Characteristics of Process

Rigid Order: Michael Jordan Rule Salvationary Mundane: team power Perpetual: keep at it All important- “love your daughter more”

SWOT Model:

1. Mission Say who we are, what we stand for “True”, not hogwash motivational, no charm school

2. External Analysis 5 micro environmental factors Porters 5 rules Threat and Opportunity

3. Internal analysis Strength and Weakness

4. Interactive analysis SWOT

5. Long term goals (5, 15, 20 years) Example: Increase market shares by 25% in 5 years

6. Long term strategies Build: Build the market (ex. breakfast with coke/snickers) Win: take away from someone else (ex. breakfast cereal) Acquire: merger (ex. bring aboard other competitors)

7. Short term goals (1 year or less) Increase market share by ___% in one year

o 1%- “steady as she goes” start of slowo 5% logical not necessaryo 30% get that and expect fall out

8. Short term strategies9. Strategy implementation managing (leadership)

Constant struggle10. Monitoring, control and feed back

Continually riding the surf

1-8 Strategy Formulation Design of Purpose3 Logics

Goals before strategies with each term External before internal Long term before short term

9-10 Strategy implementation accomplishment of purpose Where is our need for knowledge the greatest

Where is our current knowledge lowest? (glass half full or empty)Everywhere, knows more in some areasKnows the least about this need the greatestOut of the 5 forces, which is the most dynamic? Non..??

Film Case: When We Were Kings-“Rumble in the Jungle” (Zaire 1974), academy award 1997Cast:

George Plimpton: Aristocratic, sophisticatedNorman Malle: Earth, brilliant, heavy drinkersMuhammad Ali: exiled , rusty, 2-1 underdog, fight for losers payGeorge Foreman: young, strong, mean champion, heavy favorite

In Boxing Ring: underdog, plan – disaster, another plan, disaster, keep on, continuous improvement

Speech at Harvard: everything goes right, refers to 10 box step to answer flaky question One box constant: Mission, Box 1 POINT: something always comes up, perpetual

Strategic Decision Making: most decisions are bad7 Step Path to HighER quality decision making

Ex. Raw materials located in Montana and major customer source in Florida. Where do you build your plant?

Step Problem1. Decision Maker alone Tree: one tree doesn’t make a forest2. Decision maker + expert Trees3. Decision maker + expertS Group think: “goes along to get along”

LCD (lowest common denominator), C grade solution 4.Devil’s Advocate (DA)-Jester mocks but never loses head, pause to reflect

Artificiality: boy who cried wolf, just to say opposite

5.Dialectic Inquiry (DI)-no writing, live debate (ex. courtroom)-more time consuming

Compromise: cut the baby in half, worst of both worlds

6. Other Decision maker (ODM) If you can’t stand the heat, stay out of the kitchen 7.Role Rotation: varied experiences-geographic rotations or role rotation (experience lots of different jobs)

SLOW

Steps 4/5: build in conflict and break up the consensus of groupthink

Step 1 (own a tree, all got) and 7 (hole forest) look the same but are very different

Decision Making- role rotation TRAIN CAB STORY

A B C D E F G

ON QUIZ: The Feeling of personal responsibility for a project leads decision makers to commit which cognitive bias

ANSWER: E none of the above, escalation of commitment

Levels of Strategy:

Coca-Cola Pepsi CoSoda SodaJuice (minute Maid) Juice (Tropicana)Water (Disani) Water (Aquafina)

Nobody in Kroger/Marsh touches Coke or Pepsi products Manufacturing synergy: all liquids Pepsi also makes snacks (Fritos, lays, cheetos, Doritos, Quaker oats, Gatorade)

o Mouth Synergy GM and Frigidaire, Ford and Phil Co, American Chrysler made cars and refrigerators (now

changed corporate strategy)- ALL manufacturing synergies

Business Level Strategies:

1. Cost Leadership: $ - Cost = Profit2. Differentiation: offer customers something they value that are willing to pay more for,

charge more3. Both-combination, hardest but most profitable4. Focus (on product, service, everything) segment: Martha on Flour, Left hand, southern5. Not important6. Not Important7. Stuck in the middle- avoid, no strategy

Questions Should Ask shareholders, manager, employees: look for T/O w with differentiations ( and all business level strategies)

1. How people become aware of needs? Oral-B dye toothbrush2. How do customers find you? Brick and clicks (Wal-Mart store fronts and website)3. How do customers repurchase? American hospitals supply- tongue sticks/cotton balls4. What happened when product/services is delivered? Progress, provide when need it5. How’s product installed? “error 23”, HP-Compaq, DVD ( want to teach a man to fish)

Functional: Marshall, the functional resource (marketing strategy); cross functional (managers, i-core idea, Pro bowl vs. Super bowl, Titanic)

Business: Domain navigation. How do gain competitive advantage in product market? (Ford vs. Chevrolets, brand management, Porters 5 forces)

Corporate: Domain selection, what business (es) will be in? If answer is plural want synergy- 2 + 2 =5 (if you want something done, ask a busy person)Synergy: final outcome is greater than sum of parts

6. How’s Product paid for? Bank of American credit cards, invoice now easier to read “money value of time”

7. How product is transported? Pepsi 2-liter bottle, coke shaped like hourglass8. How help customers use product? Con-agras, butterball, 24 hour hotline

Strategic Management Process:

The Traditional Approach:

Implicit in chandler’s definition is that idea that strategy involves rational planning

A New approach:

Strategies can emerge from within an organization with any formal plans Mintzberg’s points is that strategy is more than what a company intends or plans to do: it is also

what it actually does “a pattern in a stream of decision or actions”, the pattern being a product of whatever intended

strategies are actually realized and of any emergent strategies CEO’s consider strategic planning an anachronism Planning involves the generations of a series of “what if” scenarios whose function is to try to

get general managers at all level of the corporation to think strategically about the environment in which they do business

Focus on scenarios : “What will we do is this happens?” ex: Royal Dutch/Shell Untouched Market: Honda and affordable motorcycles Successful strategies can emerge within an organization without prior planning often in

response to unforeseen circumstances Message for management is that it needs to recognize the process of emergence and to

intervene when appropriate, killing off bad emergent strategies but nurturing potentially good ones

Model of Strategic Management Process:

Sequences is likely to hold true only for formulating and implementing intended strategies Formulation of intended strategies is basically a top-down process, whereas the formulation of

emergent strategies is a bottom-up process

Mission and Major Goals: Provide the context within which intended strategies are formulated and the criteria

against which emergent strategies are evaluated Major goals specify what the organization hopes to fulfill in the medium to long term Hierarchy of goals: Coke within arms reach of every customer, then follows superior

stockholder returns

External Analysis:

3 interrelated environments should be examined at stage: the immediate, or industry environment in which the organization operates, the national environment and the wider microenvironment

Analyzing the national environment requires and assessment of wheater the national context within which a company operates facilitates the attainment of a competitive advantage in the global marketplace

Internal Analysis:

Involves identifying the quantity and quality of resources available to the organization

Strategic Choice:

Purpose should be to guild on company strengths in order to exploit opportunities and counter threats and to correct company weaknessesFunctional Level:

o Competitive advantage stems from company’s ability to attain superior efficiency, quality, innovation and customer responsiveness

o Improving the effectiveness of functional operations with a company such as manufacturing, marketing, material management, research and development and human resources

Business Level:

o Overall competitive them that a company choose to stress, the way it positions itself in the marketplace to gain competitive advantages and the different positioning strategies that can be used in different industry settings

o Cost Leadership and Differentiation Strategies

Global Strategies:

o Benefit and cost of global expansion and examining four different strategies: multi-domestic, international, global and transnational

Corporate Level:

o What business should we be in to maximize the long run profitability of the organization

o vertical integration, diversification in new business areas, strategic alliances, acquisitions and new ventures

Strategy Implementation:Design Organizational Structure: entails allocating task responsibility and decision-making authority within an organization (tall or wide, centralized or decentralized)Design Control Systems: how best to assess the performance and control the actions of subunitsMatching Strategy, Structure and Controls: achieving a “fit” among its strategies, structure and controlsManaging Conflict, politics and change: Power struggles and coalition building, office politics

Feedback Loop:

strategic management is ongoing process (objects attainable but poor implementation or vice-versa

Criticism of Formal Planning Systems:

Fit Model: centralized purpose is to identify strategies that align, fit or match a company’s resources and capabilities to the demands of the environment in which the company operations

Fit Model most closely associated with Harvard Business School during 1960, Kenneth Andrews

14 studies reviewed in survey by Lawrence Rhyne, 8 found varying degrees of support for the hypothesis that strategic planning improves company performance, 5 found no support for the hypotheses and 1 reported a negative relationships between planning and performance ( model not the end all and be all)

Thomas J Peters and Robert H Waterman, authors of the bestseller “In search of excellence”, are among those who have raised doubts about the usefulness of formal planning

4 reasons why doesn’t always work: 1. Planning equilibrium

Almost all larger companies currently have some kind of formal strategic planning process, a condition of planning equilibrium exists

No strategic advantage but if you don’t plan you fall behind2. Planning Under Uncertainty

future is inherently unpredictable In the real world, the only constant is change Object is to get manager to understand the dynamic and complex nature of

their environment and to think through problems in a strategic fashion Does expand peoples thinking and in such it may lead to better plans, as seems

to have occurred at Royal Dutch/Shell3. Ivory Tower:

Treat planning as an exclusively top management function, results in strategic plans formulated in a vacuum

Leads to tension between planners and operating personnel Correcting approach involves recognition that, to succeed, strategic planning

must comprise managers at all levels of the cooperation The role of cooperate-level planners should be that of facilitators, who help

operation manager do the planning 4. Strategic Intent Versus strategic fit

C.K. Prahalad of University Michigan and Gray Hamel of London Business school attacked the fit model as being “too static and limits”

Too much on degree to fit between the existing resources of a company and current environmental opportunities, and not enough upon building new resources and capabilities to create and exploit future opportunities

More concerned with “today’s problems than tomorrow’s opportunities” Secret to Toyota, Canon and Komatsu success is bold ambitions which

outstripped their existing resources and capabilities Top Management creates an obsession with winning at all level of organization

and then sustained that obsession over a ten-to-twenty-year quest for global leadership

Strategic Intent: notion that strategy formulation should involve setting ambitious goals, which stretch a company and then finding ways to build the resources and capabilities necessary to attain those goals

Strategic management process should begin with challenging goals-such as attaining global leadership. Then, throughout the process the emphasis should be on finding ways (strategies) to develop the resources and capabilities necessary to achieve these goals, rather than on exploiting existing strengths to take advantages of existing opportunities

Strategic Intent is more internally focuses and is concerned with building new resources and abilities. Strategic focuses more on matching existing resources and capabilities to the external environment

Pitfalls in Strategic Decisions:

1. Cognitive Biases Systematic errors in decision making process, creatures of habit Prior Hypothesis: strong prior beliefs about relationships between two variables making

bias toward decisions when they are even presented that their beliefs are wrong Escalating commitments when decision makers, having already committed to significant

resources to project, commit even more resources to a failing project Reasoning analogy using simple analogies to make sense out of complex problems Representative bias: rooted in tendency to generalize from a small sample or even single

vivid anecdote Illusion of Control: tendency to overestimate one’s ability to control events

(overconfidence termed the hubris hypothesis)2. Group Think: group decisions makers embark on course of action without questioning

underlying assumptions May explain why, at least in part, why companies often make poor strategic decision in

spit of sophisticated strategic management

Techniques for improving Decision making: counter acting cognitive biases and group think

Devils Advocacy: generations of both a plan and a critical analysis of the plan, possible perils

Dialectic Inquiry: generations of a plan (a thesis) and a counter plan (an antithesis) From practical point of view, however, devil’s advocacy is probably the easier method to

implement because is involves less commitment in terms of time and than dialectic inquiry