Strategy Master Class Sessions 1&24/1/14 1 Strategy Master Class for Woxsen School of Business...

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Strategy Master Class for

Woxsen School of Business

Hyderabad, March 30. 2014

Sessions 1 & 2

Baba Prasad (Ph.D., The Wharton School)

CEO, Vivékin Group, Inc.

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© 2013, Vivékin Group. Confidential 2

Session 1: Strategic Planning

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An Economics Preamble

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© 2013, Vivékin Group. Confidential

The Firm

What is a Firm?

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Inputs Outputs The Firm

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What is a Firm?

v  Concerns of the Firm u  Value Addition u  Operational Efficiency u  Marketing/Branding u  Pricing

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Outputs Inputs

The Firm v  Basic Equation

P = R – C Profits = Revenues – Costs

A Short History of Strategy

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Early Thinking about Strategy

v  500 BC Greece: “strategy is what a strategos (commander-general) does” stratos (army) + agos (leader)

v  Strategy had military underpinnings for for more than 2000 years

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The Industrial Revolutions

v  The First Industrial Revolution (mid-18th to mid-19th centuries) u  Strategic thinking not much

importance u  Chaotic business markets u  Adam Smith: Market forces form

“an invisible hand” over which individual firms have no control; hence no need for strategy

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The Industrial Revolutions

v  The Second Industrial Revolution (mid-19th to early-20th centuries) u  Emergence of railroad creates

mass markets u  By early 20th century, huge

“vertically integrated” organizations u  Alfred Chandler: the “visible hand”

of managers who could shape markets

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Large Companies

v  The BIG-3 automakers

v  Alfred Sloan of GM did SWOT analysis of his competitor, Ford

v  Chester Barnard, President of New Jersey Bell managers should pay attention to “strategic factors”

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The Origins of Strategy Frameworks

v  In the 1960s, Business Schools began to teach how to match u  “distinctive competences”

q “Strengths and Weaknesses” u  “external market forces”

q “Opportunities and Threats” u  “SWOT” analysis

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Debate over SWOT

v  SW: short-term or long-term?

v  Should SW-analysis be aimed to create and deliver new products or serve the customer?

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Igor Ansoff’s Product/Mission Matrix

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Market Penetration Product Development

Market

Development

Diversification New Mission

Present Mission

Present Product New Product

“common thread”


Boston Consulting Group (BCG)

v  1965-66 : Why do some competitors outperform others who seem similar?

v  Experience Curves u  Doubling of cumulative experience

leads to 20-30% reduction in costs

v  Applied this to Product Portfolio analysis

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BCG’s Growth-Share Matrix

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Other Methods of Portfolio Analysis

v  McKinsey consulting with GE developed the

GE/McKinsey 9-block matrix

v  1973 oil crisis: American companies became more short-term focused than long-term

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Critiques of Portfolio Analysis

v  Analytic methods propose detached solutions that do not generate the insights that hands-on experience does

v  too short-term focused to propose strategic solutions

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Michael Porter

v  US companies had begun to like studying competition

v  Harvard economists in the 1970s u Understand industry structure for its

impact on profitability, efficiency and innovation

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Threat of Substitute Products or Services

Threat of New Entrants

Rivalry Among Existing Competitors

Bargaining Power of Suppliers

Bargaining Power of Buyers

Michael Porter’s Five Forces


The Three Generic Strategies – Creating a Business Focus

v Organizations typically follow one of Porterʼ’s three generic strategies when entering a new market

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The Three Generic Strategies – Creating a Business Focus


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Industry Analysis Activity (20 mins)

v  What position did Ben & Jerry’s adopt in the market?

v  Analyze the industry using Porter’s five forces framework

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Positioning

v  Differentiation u  High Quality u  High-Price u  Social responsibility o Fair trade

u  Fun!

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Intense Rivalry in Super-premium ice cream industry

v Primary competitors include Dreyers and Haagen-Dazs

v Large, diversified companies with significantly greater resources than Ben & Jerry’s;

v Numerous competitors

v Low cost of switching to rival brands

v Dreyers and other rivals employ sales-increasing tactics

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Buyer Power: Low/High

v Power of individual customers low

v Power of grocery stores, convenience stores, and restaurants high

v  Large retailers have substantial leverage over price

v Buyers’ cost of switching to competing brands is relatively low

v Ben and Jerry’s strategy must include strong product differentiation to increase switching costs for buyers.

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Supplier Power: Moderate

v Dairy farmers, paper container manufacturers, and suppliers of various flavorings

v Moderate competitive force u  the ice cream industry is a major

customer u multiple suppliers to choose from u  suppliers’ viability is tied to the well-

being of large, established companies

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Threat of New Entrants: Moderate

v Barriers to entry in the ice cream industry are moderate u brand preferences and customer loyalty

toward established companies u Strong brand loyalty u Capital intensive o  specialized mixing facilities and

manufacturing plant u Distribution channels can be difficult to

establish for an unknown firm

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Threat of Substitutes: High

v  Many substitutes u  cookies, pies, Popsicles, cake

v  Switchover costs low

v  Strategy: to defend premium category

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Session 2: Entrepreneurial Strategy


Some Unfinished Business, First

v  Critiques of Porter’s Framework u  Too externally-oriented u  Firm has no agency

v  Late 1980s-Early 1990s u The Resource-Based View (RBV) of

the firm

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The Resource-Based View

v  Firm is a collection of “resources” u  Resources are “anything which

could be thought of as the firm’s strengths or weaknesses”

u  Resources provide “competitive advantage”

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RBV & Sustained Competitive Advantage

v  To provided sustained competitive advantage, a resource must be:

u  Valuable u  Rare u  Inimitable u  Non-substitutable

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V R I N

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Core Competence

v  Resources enable capabilities and competencies

v  Company must focus on its best competence— u  core competence

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The Book and the Authors

Prof Renee Mauborgne

© JOHN ABBOTT

Prof Chan Kim

© JOHN ABBOTT

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New Market Space

v Red oceans and blue oceans make up market universe

v Red oceans: all industries in existence

= known market space

v Blue oceans: all industries not in existence

= unknown market space


Red Oceans vs. Blue Oceans v  Red oceans

u  Industry boundaries defined and accepted u  Competitive rules of game known u  Companies try to outperform rivals; cutthroat competition u  As market space gets crowded, prospects for profit and

growth reduced u  Products become commodities u  Red ocean strategy is a market-competing strategy

v  Blue oceans u  Undefined market space, demand creation, opportunity for

highly profitable growth u  Most are created from within red oceans by expanding

existing industry boundaries u  Rules of game waiting to be set u  Competition irrelevant u  Blue ocean strategy is a market-creating strategy

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The Impact of Creating Blue Oceans


Value Innovation: The Cornerstone of Blue Ocean Strategy

•  Creators of blue oceans follow value innovation

•  Value Innovation –  Equal emphasis on value

and innovation –  Defies value-cost trade-off

of competition-based strategy

–  Successful value innovation: •  Drives down costs while

driving up buyersʼ’ value •  Uses a whole-system approach •  Follows reconstructionist view

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The Six Principles of Blue Ocean Strategy

Formulation Principles Risk factor each principle attenuates

Reconstruct market boundaries Focus on the big picture, not the numbers Reach beyond existing demand

Get the strategic sequence right

" Search risk " Planning risk

" Scale risk " Business model risk

Evaluation principles Risk factor each principle attenuates

Overcome key organizational hurdles Build execution into strategy

" Organizational risk " Management risk

Example of a Blue Ocean Creation

The American Wine Industry

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What the industry offers

Premium Wines Budget Wines

Massive Choice

Polarised Strategic Groups


American Wine Industry v 3rd largest in world: worth $20 billion

v Californian makes 66% - the rest is from Italy, France, Spain, Chile, Argentina, Australia

v Exploding number of new wines – new vineyards in Oregon, Washington, New York

Customer base stagnant 31st in the world in per capita consumption!

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American Wine Industry

v Top 8 producers had 75% of the market; 1600 had the remaining 25%

v $ millions spent in marketing - Titanic battles – intense competition

v Severe price pressure

v The dominant growth strategy was towards premium wines – more complexity, better image, more prestigious vineyards, number of medals won at wine festivals.


What wine customers said

v  “It is too confusing and complex”

u  Wine descriptions and terminology

u  The shopping experience

u  The lack of clear guidance on what to buy and drink

v  Thus, massively intimidating for ʻ‘noncustomersʼ’ (the large majority of the US population who were not wine drinkers)

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Segmentation of Market and Brands Low

Involvement High Involvement

Easy Going Enjoyers Aspirationals Appreciators Connoisseurs

• Glass with friends

• Least care choosing a wine

• Not wine preferrers

• Price is a strong influencer

• Everyday enjoyment • To relax/unwind • Stick with limited list of known brands • Choose in-store • Not interested in wine language

• Influenced by major brand advertising

• Image important • Wine preferrers (sic) • Varietal knowledge • Interested in some wine language • Enjoy trying new wines

• Visit wineries / read wine articles

• Want to discover wine • Knowledge of wine regions • Frequently buy >$10 wines • Join wine clubs • Don’t stick to known brands

• Ideal wine is complex & interesting

• Sophisticated drinker • Discerning wine tastes • Don’t decide in store • Have a cellar • Less influenced by specials/ promotions

• Actively pursue wine knowledge

Brand: Lindemans Rosemount Estate Wolf Blass Penfolds

Demographic: M/F: 50/50 Age: 35-49

M/F: 30/70; Age: 30-40

M/F: 70/30; Age: 35-50

Age: 40+


Strategy Canvas

High

Low Price Use of

enological terminology

Above-the-line marketing Aging

quality

Vineyard prestige and legacy Wine

complexity

Wine range

Budget Wines

Premium Wines

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What factors should be

eliminated that the industry has taken

for granted?

Eliminate

What factors should be reduced

well below the industry standard?

Reduce

What factors should be created that the industry has never

offered?

Create

What factors should be raised well beyond the

industry standard?

Raise

Four Actions to create a Blue Ocean

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Yellow Tail v Only 2 types initially – Chardonnay and Shiraz v  Fruity, soft on palette, sweet-ish – great for those who

had not drunk wine before v  Same bottle for red and white – low logistics costs v  Simple vibrant packaging – lower case letters/

kangaroo v  Un-intimidating v  They were selling “The essence of a great land …

Australia” – ie they were not selling the wine v Australian clothing for the retail staff – they

enthusiastically promoted a wine they could understand.


Results

v No 1 imported wine (outsells France and Italy)

v Fastest growing imported wine in the history of the USA industry

u  New consumers of wine

u  Jug drinkers trade up

u  Premium wine drinkers trade down

v Industry criticizes them mercilessly at first

Now wine press blurb gives it a “best buy” for value; winning wine awards.

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Blue Ocean Strategy Canvas Exercise (30 minutes)

v  Your group is starting an ice-cream company

v  Identify what the competition is and map the features on the strategy canvas

v  Determine what your company will do to create a blue ocean

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What factors should be

eliminated that the industry has taken

for granted?

Eliminate

What factors should be reduced

well below the industry standard?

Reduce

What factors should be created that the industry has never

offered?

Create

What factors should be raised well beyond the

industry standard?

Raise

Four Actions to create a Blue Ocean


Entrepreneurial Strategy

v  Marked by uncertainty more than risk

v  Difference between risk, uncertainty, and deep uncertainty

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Cognitive Distribution of New Venture/Topline Decision Making

Effectual

Causal Low

Low High

High Expert Entrepreneurs

Experienced VCs

Angels

Organic Growth Leaders

Corporate Managers

Novice VCs

Novice Entrepreneurs


The 5 Principles of Effectuation

v  #1 Bird in Hand Principle u  Start with Who you are, What you know, &

Whom you know (not preset goals)

v  #2 Affordable Loss Principle u  Invest what you can afford to lose—extreme

case $0 (not expected return)

v #3 Crazy Quilt Principle u  Built a network of self-selected stakeholders

(not competitive analysis)

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The 5 Principles of Effectuation (contd.)

v #4 Lemonade Principle u Embrace and leverage surprises

(not avoid them)

v #5 Pilot-in-the-Plane Principle u The future comes from what

people do (not inevitable trends)

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Non-predictive control

Co-create

Plan

Persist

Adapt Low

High

Low High

PREDICTION

CONTROL

= Non-predictive control

How do you control a future you cannot predict?

You co-create it through stakeholder commitments

Plan

Persist

Adapt

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Saras Sarashwathy, University of Maryland

v  For more on effectuation, read Saras Saraswathy’s book, “Effectuation”

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www.vivekingroup.com

Strategy Master Class Sessions 1&24/1/14 1 Strategy Master Class for Woxsen School of Business...

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