Strategy Flashcards
What is Strategy
Strategy is a broad term encompassing:
- goals and objectives of the firm
- the firm’s environment, resources, structure, and activities
- ultimately, the behaviour of its members
Strategy can be described as:
- a unified, comprehensive, and integrated plan aligning the firm’s strengths with the challenges in the environment
- a pattern of decisions that define what products the firm sells, which customers it targets, and how it differentiates itself, ultimately shaping its identity and success
Plans vs Patterns in Strategy
Plans: represent intended strategies, what the firm wants to do in the future
Patterns: reflect realised strategies, showing what actually happens over time
Mintzberg’s Typology of Strategies
- states that a plan is an intended strategy
- Intended strategy: the original plan
- Unrealised strategy: the parts of the plan that fail
- Deliberate strategy: the parts of the plan that are successfully executed
- Emergent strategy: spontaneous strategies that arise in response to unforeseen circumstances
- Realised strategy: the overall pattern of decisions that reflect the company’s actual actions
Strategic Process
A strategic process is the way in which a strategy is formed. Organisations differ in how they do this. Experts have recognised that there are distinct approaches on how organisations form strategy.
Six Strategic Approached
- Rational Approach
- formulating a clear intended strategy using SWOT (strength, weaknesses, opportunities, and threats) analysis
- by identifying strengths and weaknesses, firms can predict future outcomes
- this approach can be flawed or incomplete but provides a good starting point for strategy formulation - Flexible Approach
- envisioning multiple future scenarios rather than trying to predict a single outcome
- conducting multiple SWOT analyses to prepare for different possible scenarios
- similar to the rational approach but less cost-effective since preparing for all scenarios can waste resources on scenarios that may never materialise - Creative Approach
- encouraging creativity and imagination rather than relying on standard analysis
- e.g. Steve Jobs often ignored customer feedback, believing he could predict future customer desires better than they could
- creativity remains important, but a successful strategy must still be based on knowledge of the environment and the company’s resources
These approaches 1-3 are prescriptive theories
- they give advice on how to formulate strategies and reach intended goals
- Behavioural Approach
- studies how managers’ values, power dynamics, and politics influence strategy formulation
- strategy is more influenced by top management’s perception and political manoeuvring than by rational analysis
- highlights how powerful individuals can override rational analysis in favour of personal agendas or preferences - Emergent Approach
- strategies emerge spontaneously as organisations learn from their actions over time
- e.g. IKEA adapted by selling furniture in parts after realising the difficulties of transporting large items
- this approach is descriptive: it looks at how strategy actually develops over time through real-world experiences
Approaches 4-5 are descriptive theories
- they focus on how strategies are actually formed in practice, based on real-life observations
- Absence of Strategy
- in some cases, managers are too focused on daily operations to consciously formulate strategic plans
- even without an explicit strategy, firms still make strategic decisions such as pricing and location
- this demonstrates that every business has a realised strategy, even if it is not formally written or explicitly planned
Types of Theory in Strategy
Prescriptive Theory
- offers advice on how to do something in an ideal world
- often found in managerial books, self-help guides, and consultancy
- rational, flexible, and creative approaches to strategy are prescriptive theory
Descriptive Theory
- describes, predicts, and seeks to understand real-life behaviours and decisions
- academics use descriptive theories to explain how strategies are formed in practice
- behavioural and emergent approaches to strategy are descriptive theories
External Analysis
While internal analysis helps in strategy formulation, understanding the external environment is equally crucial for firms to remain effective.
External analysis focuses on understanding the macro-environment, industry dynamics, competitive forces, and stakeholders.
SEPTEmber Analysis
A tool to study the macro-environment, SEPTEmber identifies five key segments affecting a firm’s strategy.
- Sociocultural Segment
- examines demographics, income patterns, education levels, and societal attitudes - Economic Segment
- focuses on macroeconomic factors like income per capita, unemployment rates, inflation, and interest rates - Political-Legal Segment
- considers political stability, taxation policies, trade regulations, and subsidies - Technological Segment
- tracks technological advancements, R&D trends, and infrastructure developments - Ecological Segment
- looks at environmental factors like natural disasters, resource availability, and climate impact
Industry Lifecycle
The industry lifecycle outlines the evolution of industries through four stages:
1. Initiation
- new industry with innovation but low competition
2. Growth
- demand rises, firms enter the market
3. Maturity
- growth slows, competition intensifies, and firms optimise costs
4. Decline
- sales and profitability decrease, market exits occur
Three key insights:
1. easier to find new clients in growing industries
2. mature industries have more efficient firms, making it harder for new entrants
3. in declining industries, it is difficult to find new markets and clients, you then compete for existing customers
As businesses gain more experience producing a product, costs go down. As an industry gains more experience producing a product, costs of the firms within the industry should, on average, go down.
- this is called the “Experience Curve”
Porter’s Five Competitive Forces
This framework explains industry profitability differences through five variables.
- looks at why firms differ in how profitable they are
- Threat of New Entrants
- high entry barriers reduce this threat, protecting industry profitability
- types of barriers to entry - economies of scale
- industry maturity
- customer switching costs
- capital requirements
- access to distribution channels
- expected retaliation
- Bargaining Power of Suppliers
- high supply power increases industry costs and lowers profitability
- factors include high supplier concentration, switching costs, and lack of substitutes - Bargaining Power of Buyers
- powerful buyers demand lower prices, reducing profitability
- high concentration of buyers, low switching costs, or price sensitivity amplify this power - Threat of Substitutes
- substitute products cap pricing power and reduce industry attractiveness
- the threat is high when substitutes are affordable, available, and perform well - Competitive Rivalry
- intense rivalry reduces profitability
- factors include a high number of competitors, slow industry growth, and low differentiation opportunities
Stakeholder Analysis
Stakeholders are actors with claims or expectations from the company. A strategic stakeholder analysis identifies:
- stake: the importance of their claim
- power: influence over the firm
- dependence: degree of reliance on the firm
To identify the key stakeholders, companies create a stakeholder map.
- plots stakeholders based on their power and stake size to prioritise their needs
Formulating Strategy
Rational Approach to Strategy
- combines internal analysis with external analysis
- a confrontation analysis bridges the findings from internal and external analyses
Portfolio Analysis
- evaluates business units or products by considering internal factors (market share) and external factors (market growth).
- the BCG Matrix is a popular framework
SWOT Analysis
SWOT stands for:
- Strength: internal capabilities to achieve objectives
- Weaknesses: internal barriers hindering objectives
- Opportunities: external conditions favourable to the firm
- Threats: external conditions posing risks to the firm
Confrontation Analysis
- confrontation should give rough input for strategy formulation
- SWOT is more than just a list of the strengths, weaknesses, opportunities, and threats
- match strengths to opportunities
- mitigate weaknesses against threats
- inspired customised strategies based on the analysis
The BCG Matrix
- Cash Cows
- high market share, low market growth
- generate stable cash flows with low investment needs
- e.g. mature and established products - Stars
- high market share, high market growth
- strong position, high revenue generation potential
- investments are needed to maintain dominance - Question Marks
- low market share, high market growth
- offer opportunities but require risky investments
- firms decide whether to invest further or divest - Dogs
- low market share, low market growth
- limited opportunities
- firms often divest or restructure
Formulation Strategy: Porter’s Generic Strategies
A firm must adopt one of these approaches to gain competitive advantage:
- Cost Leadership
- achieve the lowest cost of production in the industry
- not always the lowest price, the focus is on efficiency and high margins
- protects from Porter’s five forces - Differentiation
- provide superior value through unique product features or services
- justifies higher pricing and builds customer loyalty
- protects from: - rivalry: less price competition
- buyer power: loyalty and switching costs
- threat of substitutes: unique offerings
- Focus Strategy
- specialise in a niche market segment
- can adopt cost leadership or differentiation within the niche
- narrow scope enables better service and higher customer satisfaction
Trade-offs in Strategy
Firms face trade-offs when aligning their strategy components.
Example:
- cost leadership limits customisation but achieves efficiency
- growth objectives may reduce profitability in the short term
- consistency is key: strategy components must align logically with each other
Formulation Strategy: Strategy Segment
A clear and concise summary of the firm’s strategy, covering three elements:
1. Strategic objective
- a time-bound, quantifiable target
- Scope
- the market, customer segments, and geographies targeted
- broad or narrow depending on generic strategy - Competitive advantage
- how the firm excels compared to competitors
- includes value proposition and internal alignment
Example Strategy Statement - IKEA:
- Objective: increase turnover by 25% by 2024
- Scope: affordable home furnishings for a broad customer base
- Competitive Advantage: cost-effective processes and innovative designs
