WHAT IS STRATEGY?
What is strategy?
The determination of long-run goals and objectives of an enterprise and the adoption
of courses of action and the allocation of resources necessary for carrying out these
goals.
Successful strategy:
1. Clear and consistent long-term goals
(duidelijke en consistente langetermijndoelen)
2. Good understanding of the competitive environment
(goed begrip/goede kennis van de competitieve omgeving)
3. Building and using the resources and capabilities to achieve goals, to develop a
competitive advantage
(middelen en capaciteiten opbouwen en gebruiken om doelen te bereiken en om
concurrentievoordelen te ontwikkelen)
4. Effective implementation
(effectieve implementatie)
5. Strategic fit between goals, environment, resources and capabilities,
implementation
(strategische fit tussen doelen, omgeving, middelen en capaciteiten en
implementatie)
1. Clear and consistent long-term goals
A strategy of the company is about the long-term goal of the firm, typically in terms of
performance. A typical goal of a company is to perform better in the future. There are
3 indicators to determine how you can perform as a company (= the three
determinants of a company’s value creation).
- Sales growth (selling more) → verkoopgroei, meer verkopen
- Sales margin (amount of profit you make on the sale) → verkoopsmarge, winst
dat je maakt op de verkoop van een product, verkoopprijs – gemiddelde kosten
= verkoopmarge)
- Capital turnover (total sales/amount of capital invested in the company, how
many capital I invested to reach the sales)
You want to take decisions in order to improve these 3 indicators.
Example McDonalds: goals and strategy
“focus on growing sales (=sales growth indicator) with the same capacity (= capital
turnover indicator)
- They want to sell more, without investing more capital → trying to sell more in
the already existing restaurants
- They do not mention the sales margin indicator, because there are only 2 ways
to increase the sales margin: by raising the price or by lowering the average
cost. McDonalds is active in a very price sensitive industry, so when they raise
their price, customers will go to a concurrent. McDonalds is already producing
at a very low average cost (massive scale economies, they now how to
produce efficiently so te average cost is already minimized).
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, -
Conclusion: the only way to improve the performance of McDonalds is by
selling more (= sales growth). In some industries you do not need to focus on all
three indicators.
2. Good understanding of the competitive environment
You need a good understanding of all the (potentially) important determinants
(positive as well as negative determinants) of industry profitability (average profitability
of firms active in the industry.
You can use frameworks to determine industry structure and profitability:
- PEST (macro environmental: political, environmental, social, technological)
- Porter 5 forces
o Industry rivalry: rivalry between companies who are already in the industry (the
more rivalry, the more competition, the less attractive the industry)
o Supplier power: the higher the supplier power (bargaining power of the
suppliers = onderhandelingsmacht), the higher the prices the supplier can ask,
the less attractive the industry
o Buyer power: if the buyers have a lot of bargaining power, they can negotiate
well and demand low prices and high quality, the industry will be less attractive
o Threat of entry: how difficult it is to enter the industry. The higher the threat of
entry, the easier new companies can enter, the less attractive the industry
o Substitutes: different products but they satisfy the same need of the customer
(for example a car and a bicycle)
➔ Op basis van deze 5 factoren kan je een analyse van de industrie maken
(industry analysis = exhaustive overview of factors affecting industry
profitability)
Examples:
Tobacco industry: profitable
- Threat of entry = low (difficult to enter industry, difficult to sell cigarettes)
- Competition = low
- Buyer power = low (and buyer ≠ price sensitive, buyer is loyal to its brand)
- Supplier power = low (cigarettes-selling companies can easily switch suppliers)
- Substitutes ≠ powerful
Airline industry: not profitable
- Threat of entry = high, easy to enter (everyone can start with one fly route,
everyone can lease a plain, everyone can lease a gate, …)
- Competition = high, each company has a small market share, companies
compete on price (traveler just looks at price and chooses the lowest-cost
flight)
- Buyer power = high (customers have a lot of different options and they have
perfect information about the offer, which makes it easy to switch between
companies, customers are price sensitive)
- Supplier power = high (few producers of airplanes, few airports)
De winstgevendheid van een industrie kan berekend worden aan de hand van de
ROE (return on equity, measure for profitability of a firm, = net income/stakeholders
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, equity → netto winst/eigen middelen, meet rentabiliteit van de eigen middelen (bv.
een ROE van 15% → per 100 euro eigen middelen, 15 euro winst)
3. Building and using the resources and capabilities to achieve objectives to develop
a competitive advantage
A company has a competitive advantage if it creates more value than its competitors
→ when the difference between the consumers’ willingness to pay and the average
cost is larger
value created = WTP – costs
producer surplus: value created – value captured by
consumers (consumer surplus)
the difference between the price payed and the WTP is
the value captured by the customer
WTP = the value of the product for the
customer, maximum amount he wants to
pay
value created = difference between the
WTP and the average cost
average cost also increases in order to
have a better-quality product
Competitive strategy and position are more important for performance than the
industry. It is critical to be in an industry in which you can obtain a competitive
advantage, even if the industry is not profitable for the average firm
➔ Very often entrepreneurs are attracted to profitable or ‘fashionable’ industries,
even in case their company has no competitive advantage. = not good
Competitive advantage = cost versus differentiation advantage and relies on
resources and capabilities which are:
- Unique/scarce (if another company has them it will not allow you to do better)
- Relevant/valuable (should have an impact on the WTP or average cost)
- Durable (remain valuable over time)
- Not transferable (your resource may not be able to move to another company,
ex. brand name)
- Not replicable (difficult or other companies to imitate them)
4. Effective implementation
The ultimate success of the firm depends on how the strategy is implemented (how
the firm is organized).
- Intended strategy > emergent strategy > realized strategy
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, ! your strategy is an idea about the long term, but you do not know wat will happen
(future = uncertain)
Organization has three key pillars (organisatie heeft 3 belangrijke pijlers):
- Structure
- Systems
- Culture
5. Strategic fit
The strategy is consistent with the internal environment and the external environment
- Intern environment: resources and capabilities (interne omgeving: middelen en
mogelijkheden)
- External environment (externe omgeving)
Strategy as interface:
your strategy should be in line with
the company itself and with the
environment
How to describe a strategy?
Strategic decisions
- Key for long term success of a company (every successful company had a good
strategy)
o ‘where and how do we compete’
- Typically hard to reverse
o Commitment
o Size of investments
- Provoke reaction from competitors (game theory)
- Coordinating decisions necessary for coherence and consistency (all decisions
and activities need to be aligned and coherent)
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