Business Strategy
Cambridge University Entrepreneurs 2 November 2000
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A great idea for a new business needs to be supported with a sound strategy
A great idea
Strategic analysis Understanding the impact of the economic and competitive environment on the future of your proposition
Strategic choice Identifying and choosing between the possible strategic options open to you
Implementing the strategy Identifying how you will make it happen and exactly what you’ll do
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Strategic analysis is about understanding how changes in the wider environment affect your business proposition
What is going on in the market
PEST analysis – a checklist for assessing the drivers within the business environment in which you will operate
Porter’s five forces model – a model to characterise the competition your business will encounter
How well placed are you to exploit the opportunities and counter the threats
SWOT analysis – a framework for matching organisational strengths and weaknesses to opportunities and threats
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PEST is a simple checklist for analysing the drivers within your business environment
Political/legal
Regulation Tax regime
Economic
Business cycles Economic trends – inflation, money supply … Unemployment/labour supply
This is a quick checklist to prompt thinking about the environmental factors relevant to your business – there may well be others Don’t try to be comprehensive – concentrate on the top few factors that will have the greatest impact on your business Look for the long-term drivers of change (for example, globalisation, technical shifts, potential shortages of key resources … ) Identify any factors that may pose an opportunity for you but not your competitors – this could be an essential source of competitive advantage
Environmental ‘green’ issues
Employment laws
Government stability and legislative agenda
Disposable incomes
Energy availability and cost
Social Population/demographics Income distributions
Technological Government spending on research
Lifestyle expectations/ consumerism Education levels
Social mobility
Innovations
Focus of technology effort
Speed of technology transfer
Remember that the outcome of doing a PEST analysis is a sound understanding of the opportunities and threats your business will face
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Porter’s model looks at how the immediate competitive environment shapes business strategy
Competitive markets are shaped by the threat of new entrants or substitute products/services, and the relative power of suppliers and customers
Potential new entrants
There is likely to be intense rivalry between different players attempting to compete in the same marketplace
Suppliers
Industry rivalry Buyers
Substitutes
Michael Porter’s ‘Five Forces’ model (1980)
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‘Buyers and suppliers’ can place constraints on your business and limit margins
Suppliers have market power when:
your choice of alternative suppliers is limited
Individual customers can exert influence over your business when:
‘switching costs’ – the economics of changing supplier – are high
their product/service has a high-profile brand (for example, ‘Intel Inside’) your business is not that important to them – demand for their product is high and they could easily sell elsewhere
they buy a large proportion of your output (can demand bulk discounts, special invoicing terms … ) they have several other potential sources of supply to choose from (for example, commodity products) and seek to ‘squeeze’ their suppliers
your product/service forms a large part of their cost-base – they will shop around for the best deal
Strong suppliers might pose a threat of forward integration if you are unwilling to meet their price demands
Customers might pose a threat of ‘backward integration’ if your prices are too high
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Your share of the market can be eroded by competition
The ability of new players to enter the market depends on the existence of ‘barriers to entry’ put up by incumbents
Direct substitution
mobile phones displace pagers CDs replaced records….and in turn may themselves be supplanted
economies of scale capital requirements needed access to distribution channels (for example, pubs, cinema … ) experience of operating in the market likely retaliatory behaviour government legislation or regulation
Indirect substitution (competition for consumer spend)
new car or a holiday? ‘doing without’ (for example, giving up drinking, smoking … )
Differentiation/innovation (builds brand and image)
Alternative products and services can render your offerings unattractive or even obsolete
One tactic to resist substitution is to build in ‘switching costs’, which make it uneconomic to change to the new product; another is to build customer loyalty to your product by offering incentives to keep buying
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A SWOT analysis matches environmental opportunities and threats with organisational strengths and weaknesses
Analyse the environmental opportunities and threats first (for example, using PEST)
Also consider the customer need which you will fulfil
Areas to think about in looking at organisational strengths and weaknesses include:
marketing alliances
access to financial resources production technology
Define organisational strengths and weaknesses in terms of exploiting these opportunities and defending against the threats Measure strengths and weaknesses relative to those of your competitors – there are not absolute measures Try to get objective independent assessments of strengths and weaknesses – those of managers or founders in the firm are inevitably distorted and subjective
Focus on the top few issues – don’t let too much detail cloud the message Avoid looking too much at the past – focus on the competitive position now and in the future
distribution workforce
organisational structure clarity of strategy !
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Strategic choice is about deciding your high level approach to ensure success and in which parts of the market you will play
What is your key competitive advantage
Generic strategies for market entry
Off all the activities involved in delivering a service or product to a customer – which will you be involved in
Value chain models
If you are selling more that one product or service – are you developing a balanced portfolio
Portfolio analysis
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One critical choice is the way in which your business will create competitive advantage over your rivals
Three fundamental ‘generic’ strategies:
Differentiation – requires some unique element of service/product for which the customer is willing to pay a premium price (for example, high performance cars, designer clothes … ) Focus – business concentrates on serving the precise needs of a very narrow, welldefined market segment (for example, Coca-Cola) – classic strategy of new start-ups
Competitive scope
Cost leadership – business sets out to be the lowest cost producer in the industry – maybe through technology). Emphasis is on achieving economies of scale/absolute cost advantage over competitors (for example, voice telephony services, steel manufacture … )
Source of competitive advantage
Low cost
Industry-wide
Differentiation
Cost leadership
Differentiation
Segments
Focus
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It is vital to understand the value chain for your industry and where you plan to fit in
Person-to-person mobile services
End user
Terminal
Access Terminal provision
End user
Mobile ecommerce expands the value chain
Security services
Payment Goods and services processing
Content packaging
Access provision
Terminal
End user
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It is also worth considering the role different players may be taking within the value chain
Access provision Goods and services
Content packaging
Payment processing
Security services
Mobile operators
Content providers
Financial institutions Other merchants
Internet portals Mobile portal startups Virtual ISPs
Eqpt manufacturers Core business Increasing involvement Potential involvement No involvement
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Portfolio analysis helps assess the balance of activities (business units or product streams) across the company
High Business growth rate (%)
Problem children
Stars
Dogs
Cash cows
Low Low
Market share (relative to competitors)
High
The Boston Consulting Group (BCG) matrix
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The BCG matrix is a visual display showing the expected balance between cash users and cash generators
Stars have high market shares in a growing market. Company may be spending heavily to win this share but is hopefully gaining valuable experience (reducing costs) faster than competitors Cash cows have high market shares in a mature (slow growth) stable market. High market share should mean unit costs lower than those of competitors
BCG matrix has the advantages of simplicity and clarity, but there are caveats:
markets (and hence market share) may be difficult to define it’s a static analysis – it’s worth thinking where individual products/business may migrate over time
Dogs have low share in static or even declining markets. They may be a drain on resources as the company struggles to keep them going Problem children are products or businesses in a growing market but with low market share. They represent risky investments – heavy cash investments to grow market share may not be matched with operational costs reductions
designation as a cash cow can stifle innovation and revitalisation
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Case study – Manchester United PLC
Current revenue streams
Gate receipts Merchandising
Television rights Sponsorship Catering/events
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Manchester United PLC – revenue breakdown
CAGR 97-00 8% 16%
33%
-9%
12%
Source: Manchester United PLC Annual Report 1997 and 2000
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Case study – Manchester United PLC Breakout group activities
Prepare a succinct statement of what you think Manchester United’s ‘product’ is
For each current area of the business consider external opportunities and threats Conduct a portfolio analysis of the different areas of the business (guess relative market share)
Devise a simple strategy to grow each area of the business
Consider radical strategies the company could adopt to significantly enhance revenue growth in the coming years
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