Business Strategy[1]

Business StrategyCambridge University Entrepreneurs2November 20002A great idea for a new business needs to be supported with a sound strategyStrategic analysisUnderstanding the impact of the economic and competitive environment on the future of your propositionImplementing the strategyIdentifying how you will make it happen and exactly what you’ll doStrategic choiceIdentifying and choosing between the possible strategic options open to youA greatidea3Strategic 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 threats4PEST is a simple checklist for analysing the drivers within your business environment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-termdrivers 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Remember that the outcome of doing a PEST analysis is a sound understanding of the opportunities and threats your business will faceRegulationTax regimeEnvironmental ‘green’ issuesEmployment lawsGovernment stability and legislative agendaPolitical/legalBusiness cyclesEconomic trends –inflation, money supply …Unemployment/labour supplyDisposable incomesEnergy availability and costEconomicPopulation/demographicsIncome distributionsLifestyle expectations/consumerismEducation levelsSocial mobilitySocialGovernment spending on researchInnovationsFocus of technology effortSpeed of technology transferTechnological5Porter’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There is likely to be intense rivalry between different players attempting to compete in the same marketplaceMichael Porter’s ‘Five Forces’ model (1980)IndustryrivalryPotential new entrantsBuyersSubstitutesSuppliers6‘Buyers and suppliers’ can place constraintson your business and limit marginsSuppliers have market power when:your choice of alternative suppliers is limited‘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Strong suppliers might pose a threat of forward integration if you are unwilling to meet their price demandsIndividual customers can exert influence over your business when: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Customers might pose a threat of ‘backward integration’ if your prices are too high7Your 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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Differentiation/innovation (builds brand and image)Alternative products and services can render your offerings unattractive or even obsoleteDirect substitutionmobile phones displace pagersCDs replaced records….and in turn may themselves be supplantedIndirect substitution (competition for consumer spend)new car or a holiday?‘doing without’ (for example, giving up drinking, smoking … )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 buying8A SWOT analysis matches environmental opportunitiesand 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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Areas to think about in looking at organisational strengths and weaknesses include:marketingalliancesaccess to financial resourcesproductiontechnologydistributionworkforceorganisational structureclarity of strategy !9Strategic 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 analysis10One critical choice is the way in which your businesswill create competitive advantage over your rivalsThree fundamental ‘generic’ strategies: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 … )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, well-defined market segment (for example, Coca-Cola) –classic strategy of new start-upsCost leadershipDifferentiationLow costDifferentiationSegmentsIndustry-wideCompetitive scopeSource of competitive advantageFocus11It is vital to understand the value chain for your industry and where you plan to fit inEnduserTerminalMobile ecommerce expands the value chainAccessprovisionContentpackagingGoods and servicesAccessprovisionTerminalTerminalEnduserEnduserPerson-to-person mobile servicesPaymentprocessingSecurityservices12It is also worth considering the role different players may be taking within the value chainIncreasing involvementCore businessPotential involvementNo involvementMobile operatorsOther merchants Financial institutionsInternet portalsMobile portal startupsContent providersEqpt manufacturersVirtual ISPsContentpackagingAccessprovisionGoods and servicesSecurityservicesPaymentprocessing13Portfolio analysis helps assess the balance of activities(business units or product streams) across the companyThe Boston Consulting Group (BCG) matrixBusiness growth rate (%)StarsDogsMarket share (relative to competitors)LowHighLowHighProblem childrenCash cows14The BCG matrix is a visual display showing the expectedbalance 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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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designation as a cash cow can stifle innovation and revitalisation15Case study –Manchester United PLCCurrent revenue streamsGate receiptsMerchandisingTelevision rightsSponsorshipCatering/events16Manchester United PLC –revenue breakdown12%-9%33%16%8%CAGR 97-00Source: Manchester United PLC Annual Report 1997 and 200017Case study –Manchester United PLCBreakout 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 years18www.analysys.comwww.vbnonline.com