STRATEGY
What is strategy?
The determination of long-term goals and objectives of an enterprise and the adoption of courses of
action and the allocation of resources necessary for carrying out these goals. (zie ppt)
The components of a successful strategy:
1) Clear and consistent long-term goals: This does not involve the operational decisions as they are
not the ultimate drivers of long-term success => What industry? What product?
2) Good understanding of the competitive environment: Understand the fundamentals of the
industry as well as their evolution. Get insight in the key elements of industry success so
understand what negative/ positive aspects are embedded within it in order to eliminate or
exploit them.
3) Building the resources and capabilities and use them in order to achieve the goals, to develop
competitive advantage: in order to create value or bring down costs, a corporation will need the
necessary amount of resources
4) Effective implementation: Bridge the gap between strategy and execution by organizing your
organization in such a manner that allows for that supportive infrastructure
5) Strategic fit between goals, environment, resources and capabilities, and implementation: Line
up your goals with the competitive environment: Being cost efficient does not have any effect in
an industry based on differentiation, a fast moving industry has no place for a bureaucratic top-
down business.
Clear and consistent long-term goals
Every company wants to maximize its value creation. That’s why, for every company, 3 main
objectives arise in formulating long-term goals:
1) Sales growth: expanding the amount of units sold
2) Sales margin: Increasing profit per product
3) Capital turnover and resource utilization: this component, calculated by dividing the sales by
capital invested in company, is a measure for the productivity of your investments by indicating
how many dollars in sales you have per dollar invested in the company. => In other words, invest
more productively
Universally, improving these components are imperative for becoming successful as company
The example of IBM
1) Revenue growth (=sales growth): By shifting to aster growing business and strategic acquisitions
(buying company = buying future sales) => “Growth markets become 30% of geographic
revenue” & “invest $20 bil in acquisitions”
2) Operating Leverage (=Sales Margin): Focusing more on products that enable for higher profit
margins by global integration and process efficiencies => “Software becomes 50% of segment
profit”
3) CT & RU: “Generate $8 bil in productivity through enterprise transformation” (see example
above)
IBM saw their competitive advantage fading away as Asian companies produces knock-offs in a
manner that was much more cost-efficient. Consequently, they shifted from hard to software
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Maxine Vermeiren 2022
,STRATEGY
The example of Mcdo
“Focusing on growing sales with same capacity.”
This key objective mentions only two aspects of the three crucial elements. They want increase sales
with the capital already in place instead of expanding the business. This directly implies that the
company wants its capital turnover to grows (= selling more per restaurant).
The reason for not mentioning an increase in sales margin is the following: Mcdo has already
exhausted all opportunities to increase this margin. Increasing prices means handing over customers
to the competition. Cutting costs is probably not possible anymore as they have exhausted
economies of scale (for example, bargaining power) and meticulous optimization.
Good understanding of the competitive environment
More specifically: A good understanding of all the (potentially) important determinants of industry
profitability
Note that an industry in itself is not the profitable entity. It is the aggregate of
profitable firms = average profitability of the firms active within the industry
These determinants can be positive as well as negative. In order to model these determinants,
corporations can use models:
- PEST (Macro environmental: Political, Environmental, Social, Technological)
- Porter’s Five Forces:
A tool for identifying five forces that determine the competitive intensity and, therefore, the
attractiveness (or lack of it) of an industry in terms of its profitability. An "unattractive" industry
is one in which the effect of these five forces reduces overall profitability. The most unattractive
industry would be one approaching "pure competition", in which available profits for all firms are
driven to normal profit levels.
Porter refers to these forces as the microenvironment, to contrast it with the more general term
macroenvironment. They consist of those forces close to a company that affect its ability to serve
its customers and make a profit.
Mostly, one focusses only on industry rivalry while you can also look at supplier and clients as
competing for your profit margins. Bargaining power of suppliers drastically affect sales margins.
Also, if it is easy to enter the market, existing companies have an incentive to keep prices down
as increasing them incentives entry, the same principle holds truth for substitutes.
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1) Threat of entry: Profitable industries yielding high returns will attract new firms. New entrants
eventually will decrease profitability for other firms in the industry. Unless the entry of new firms
can be made more difficult by incumbents, abnormal profitability will fall towards zero (perfect
competition), which is the minimum level of profitability required to keep an industry in
business.
Capital requirements, economies of scale, government policies, customer loyalty, patents,… are
all components of an industry that either form barriers or gateways to access industries.
2) Threat of substitutes: A product that uses a different technology to try to solve the same
economic need. For example, water and Pepsi are substitutes, but Pepsi and coke are not as they
use the same technologies (albeit different ingredients). This distinction is important as
campaigns for drinking water will probably decrease the total market profitability of soft drinks
while a campaign for Pepsi would grow that market profitability (It’s just Pepsi making it grow at
the expense of Coke)
Relative price performance of substitute, Buyer's switching costs, Perceived level of product
differentiation, Number of substitute products available in the market are factors affecting threat
of substitutes
3) Supplier power: Suppliers of raw materials, components, labor, and services (such as expertise)
to the firm can be a source of power over the firm when there are few substitutes. If you are
making biscuits and there is only one person who sells flour, you have no alternative but to buy it
from them. Suppliers may refuse to work with the firm or charge excessively high prices for
unique resources.
Supplier switching costs relative to firm switching costs, Degree of differentiation of inputs,
Impact of inputs on cost and differentiation, Union power are contributing factors
4) Buyer power: The ability of customers to put the firm under pressure, which also affects the
customer's sensitivity to price changes. Firms can take measures to reduce buyer power, such as
implementing a loyalty program. Buyers' power is high if buyers have many alternatives. It is low
if they have few choices.
Buyer switching costs, Buyer information availability, Availability of existing substitute products,
Buyer price sensitivity are contributing factors
5) Industry Rivalry: Positioning pertains to how the public perceives a product and distinguishes it
from competitors. A business must be aware of its competitors marketing strategy and pricing
and also be reactive to any changes made.
Level of advertising expense, Powerful competitive strategy, Firm concentration ratio and
sustainable competitive advantages are contributing factors
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Maxine Vermeiren 2022
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Example: Why is the tobacco industry more profitable than the airline indursty?
- Tobacco: Buyer power is low do to price inelasticity of demand, supplier power is low (farmers
and technology not hard to copy), Industry rivalry is low because the industry is comprised of
many brands owned by few businesses, Threat of substitutes is low due to brand loyalty
Vs.
- Airline industry: A lot of competitors cause intense industry rivalry, Supplier power is high (low
competition in the industry of manufacturers) + big oil and airports having local monopolies,
Buyer power is high due to near perfect information, fixed costs are high (costs independent of
amount of customers) => Incentive to attract customers is, therefore, high1.
Building and using resources and capabilities to achieve objectives to develop CA
Larger discrepancy =
cration of CA
A company has a CA (is necessary in order to be successful in any industry) if it creates more value
than its competitors => Max(WTP – Average Cost)
If P = WTP => Consumer will be indifferent between purchasing or not purchasing
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High fixed costs = fierce competition
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