ACC311 - Week 1 Study Notes:

Strategy - those decisions that have high medium-term to long-term impact on the activities
of the organisation, including the analysis leading to the resourcing and implementation of
those decisions, to create value for key stakeholders and to outperform competitors.

There are seven aspects of strategy:

     1. Strategy is about decision making.
     2. Strategy is about long-term impacts of important decisions for the organisation.
     3. Strategy is about ‘organisations’ and not simply ‘businesses’ or ‘corporations’.
     4. Strategy is about creating value for customers and key stakeholders.
     5. Strategy is about the integration and focus of organisation functions.
     6. Strategy is about implementation of the decisions.
     7.Strategy is about outperforming competitors.

The essential question in strategy is not just achieving its aims but to ask why do some
organisations perform better than others.

Porter’s ‘five forces’ model of industry analysis - focused managers on analysing their
industries, but used a range of standard microeconomic tools to isolate ways for firms to
achieve a sustainable competitive advantage.

Porter also specifies has to compete within an industry. He suggested that there were only
three generic strategies available for achieving sustainable competitive advantage:
     1. Low delivered cost.
     2. Differentiation.
     3. Focus.

Prahalad and Hamel’s concept of the ‘core competencies’ of an organisation, developed the
concept that strategy could be developed from within, by leveraging the resources of the
organisation. This became known as the resource-based view.

Both the industry analysis and the resource-based views have been criticised as providing
only a static analysis of the current position of organisations. They do not explicitly address
the issues of (externally) how competition will develop and how necessary future resources
will be developed.

Senge developed the concept of the learning organisation, based on systems theory. He
argued that organisations should not simply react to observed problems, but should
understand the systemic causes of the problem and address those causes. 
     - Senge’s work, together with the focus on the total quality management (TQM)
movement led many organisations to focus on processes and the role of learning within the
organisation as a cause of strategic success.

A knowledge-based view of strategy was also developed, focusing on the organisational

knowledge of the organisation as an important organisational resource. This approach
emphasised knowledge as a special, unique and complex capability that could create
competitive advantage by itself.
     - Prahalad and Hamel was against the idea of TQM and benchmarking, and argued that,
while improving operational efficiency, this would not lead to any sustainable competitive
advantage. They argued that organisations should be concerned with stretching themselves
for the future of their industry, rather than having others create the future for them. This
approach stresses the important role of innovation and growth for those organisations that
wanted to survive in an increasingly uncertain and fast-changing world.

Business strategy is the link between environmental demands (including customer desires),
organisational capabilities and key stakeholder desires. An effective business strategy must
satisfy all three sets of requirements.
The following terms aim to answer the ‘long-term purpose and positioning of the
organisation’:
  - Vision. - Business strategy.
- Mission. - Corporate strategy.
- Strategic intent. - Aims.
- Core purpose. - Objectives.
- Core ideology. - Goals.

The five key questions (5Qs) of business strategy are:

     1. What amount of growth and level of profitability does the organisation seek?
     2. What products and services does it plan to produce?
     3. What customer and geographic markets does it plan to service?
     4. What generic strategy does it plan to follow to position itself uniquely against
competitors?
     5. What position in the industry does it plan to hold in the future?

Vision statement - statement that identifies the long-term strategic purpose of the
organisation.

Mission statement - statement that ‘operationalises’ the vision statement for the immediate
future periods.

Business strategy is about creating value.

Value (for the customer) - difference between what is paid or incurred in costs and what is
received in benefits from the product or service.

Industry environment - factors within the industry that affect both its profitability and the
competitive position of the organisations within it.

Industry - a group of organisations or business units producing close substitutes. 

In analysing the macro-environment, there are two important questions to consider:

     1. What are the major trends affecting the future growth of the industry?
     2. Will this industry grow faster or slower than average industry growth rates?
To make analysis of the macro-environment (external environment) a little easier, it is
divided into several types of trends that might have an important impact on the industry:
- Economic. - Technological. - Green environment.
- Political. - Sociocultural. - International trends.
- Legal. - Demographic.

Economic trends - economic indicators which might affect an industry could include gross
national product and personal disposable income growth rates, inflation rates,
unemployment levels, interest rates, exchange rates, taxation rates and wage rates.

Political trends - this area is likely to contain several key trends such as debt/income levels,
immigration policies, free trade vs national workforce support, worker/retiree ratios,
pension funding, healthcare funding and climate change adaption.

Legal trends - apart from specific legislation which comes from political influences,
developments in the legal system can also have an important influence on an industry. 

Technological trends - most industries are affected by the series of technological revolutions
in today’s society such as cloud computing, social networking, nanotechnology, artificial
intelligence and fast broadband/mobile communications.

Social/culture trends - are often difficult to capture in strategic analysis, because they
change almost imperceptibly. Nevertheless, some include the different attitudes of
Generations X and Y, movement to being more environmentally friendly, the growing LGBT
community.

Demographic trends - Even though there is a growth in the general population it may not
translate to growth in a specific population for a particular industry. For example, a reducing
birth rate will result in less demand for primary schools and products associated with
children.

Green environment trends - Lack of water, water quality, increasing greenhouse gas
emissions, deforestation, global warming and decreasing non-renewable resources are just
a few of the major issues facing the world, its industries, its business and its people.

International trends - Some likely trends that would impact on the size of international
businesses include increasing communication, constraints of supply or usage of natural
resources, greater ease in information and knowledge sharing and increasing numbers of
customers in emerging economies.

The second stage of external environmental analysis is to assess the industry environment.
The aim is to answer the following two questions:
     1. What is the current profitability of the industry?
     2. What is the expected future profitability of the industry?

 Porter developed a technique for analysing five forces that affect industry profitability. 
Porter’s five forces analysis model - analysis of the threat of new entrants, suppliers, buyers,
substitutes and rivals on profitability in an industry. 

Threat of new entrants - factors that influence this threat include:

     - Economics of scales. - Capital requirements.
     - Proprietary product differences. - Access to distribution.
     - Brand identity. - Absolute cost advantages.
     - Buyer/customer switching costs. - Government policy.
     - Expected retaliation.

Bargaining power of suppliers - factors that influence this to the industry include:
     - Differentiation of inputs.
     - Switching costs of suppliers and firms in the industry.
     - Supplier concentration relative to industry concentration.
     - Importance of volume to suppliers.
     - Cost relative to total purchases in the industry.
     - Information about supplier’s product.
     - Supplier profitability.
     - Decision makers’ incentives.
     - Threat of forward integration.

Bargaining power of buyers - the factors that influence this is the mirror image of the
bargaining power of suppliers, but this time the industry is the supplier, not the buyer, in
the transaction. So, the factors are framed in words that reflect the industry’s position I.e.
differentiation of outputs and switching costs of buyers.

Power of substitutes - depends on the following factors:

     -  Relative price/performance of substitutes.
     - Switching costs.
     - Buyer propensity to substitute.

Intensity/degree of industry rivalry - factors that need to be considered include:

     - Industry growth rate. - Brand identity.
     - High fixed costs. - Switching costs.
     - Intermittent overcapacity. - Information complexity.
     - Product differences. - Concentration and balance.
     - Diversity of competitors. - Corporate stakes.

For identifying both overall and specific gaps in performance, there are two questions:
     1. Do we/can we continue to follow our existing business strategy?
     2. Do we/can we find other business strategy options that might better fit our situation?

The gap analysis process formalises this assessment and aims to ensure that the gaps
between the elements of the current business strategy and all elements of the
environment-strategy-capability (ESC) analysis are systematically considered.
There are three environment-business strategy gaps to consider:
     1. The macro-environment.
     2. The industry environment.
     3. Key competitors.

Business strategy-capability gaps - a second set of gaps involves assessing the degree to
which the organisation’s capabilities are sufficient to carry out its business strategy. One
way to do this. Is simply to list the capabilities required to carry out the strategy and
comment on the organisation’s position.

Business tritely-organisation performance gaps - a third set of gaps that comprise of those
between the level of performance of the organisation and its existing business strategy. A
second aspect of assessing the performance of the business strategy is to formally identify
the organisation’s expectations of each of the key stakeholders and then to measure the
gap between actual performance and each expectation.

The above gap analysis is done on the basis of the current business strategy. However, when
these gaps are identified, they will influence the choice of the future business strategy. For
instance, if the gaps are very large, it is likely that a new business strategy will be chosen. If
the gaps are small, the current business strategy may be reaffirmed as the future business
strategy.

…Business strategy question 1 - Growth rate and profitability level:

Most organisations assume that they will grow. However, there are many cases where
growth is not assumed, is not desired and, in some cases, is not appropriate. These include:
     - Small, often family-owned businesses.
     - Organisations in mature industries.
     - Organisations in declining industries.
     - Poorly performing industries.
     - The public sector such as Centrelink, ASIC and the Department of Finance.

…Business strategy questions 2 and 3 - Which products, services and markets:

Most organisations begin with narrowly-based product ranges. Logically, the organisation
should concentrate on its existing products and markets, leveraging its existing capabilities
as much as possible until it obtains its optimum market position.
     At this point, the organisation seeking growth will have to expand beyond its existing
products and markets. The organisation should seek to expand either through existing
products into related markets, or through related products into existing markets.
     It should be some time before the organisation needs to expand beyond these two
positions, but further ‘related’ expansion may well take place into related products and
related markets.

Growth in existing product markets - this should be the starting strategic product-market
option for most businesses. Its aim here is to increase market share of existing products by
increasing penetration of existing markets through gaining new customers or increasing
product usage by existing customers. Existing customers can be tapped by:
     - Increasing the frequency of usage.
     - Increasing the quantity used.
     - Finding new applicants for current users.

Related products for the existing market - the most logical development for an organisation
that has limited prospects for its existing products and markets is to develop products that
are related to its current range, and to market these related products to its existing
customers. The risk level for this activity is low, because the customer base is known. There
are several ways in which closely related product development can take place:
     - Add product features and refinements.
     - Expand the product line.
     - Develop a new-generation product.
     - Develop new products for the existing market.

Existing products into related markets - another relatively low-risk way to expand a business
is to take existing products and find new, related markets for them. The risk lies in whether
the ‘related’ markets will behave in a similar fashion to the existing markets. There are ways
in which related markets can be developed for existing products:
     - Target new customer segments.
     - Expand geographically.

Related products into related markets - if the first three categories have been successfully
developed, the organisation is likely to be encouraged to seek further diversification, in the
belief that this too will be successful. As the organisation becomes more and more
separated from its base, it is likely to discover that new and different techniques and
technologies for operating are needed and the risks of failure increase.

Existing and related products into unrelated markets/unrelated products into existing and
related markets - while these strategic options are used sometimes, it is hard to see under
what circumstances they may make sense, except for opportunistic reasons.  There is so
little capability overlap between these industries that the chance of failure is high. Even
where the organisation buys a company that is performing well, as a way of minimising the
risk of new entry, the premium price necessary for such a purchase and the lack of
specialised knowledge to control the newly acquired business suggest that the risk of
financial failure would still be high.

Unrelated diversification - does not involve the diversification of either products or markets
that are related to existing activities and would seem to be even less likely to be proposed.
However, it may be appropriate in the following instances:
     - Counter-seasonal diversification.
     - Counter-cyclical diversification.
     - Limited industry prospects in existing and related industries.
     - Opportunity to use spare organisational capabilities.

Recently a new approach has emerged to address the product-market business strategy
questions. Based on a marketing (demand side) approach to identifying customer needs and
customer value, some organisations seek to provide a solution that sets all customer needs,
rather than concentrate on the production-oriented approach of products and services that
the organisation can produce. 

It is important to avoid seeing the organisation’s product or service as a commodity, that, is,
as being exactly the same as that of competitors. If the organisation sees its product or
service as a commodity, it cannot charge a premium price, so the only strategic solution
available is to compete on price, which is a very limited strategy.
     - An approach to avoiding commodity is the development of ‘freemium’, which is offering
part of the service range free, but charging a price as the volume or value of the usage
increases.

…Business strategy question 4 - Which generic strategy: 

Porter suggested that there were only three types of strategies an organisation could
pursue if it was to have a sustainable competitive advantage, which he referred to as
generic strategies as they were arguably applicable across all industries. There were:
     1. Differentiation.
     2. Focus.
     3. Low cost.

Differentiation - developing a product that is different from that of competitors. The aim is
to reduce the level of competition by making the offering unique. Some ways of
differentiating include competing on the basis of:
     - Product quality. - Product innovation.
     - Product reliability. - Service levels.
     - Product features. - Brand name.
     - Distribution channels. - Patent protection.
     - Flexibility (offers a wide range of customisation).

Risks of a differentiation strategy include:

     - The degree of differentiation may not be suitable.
     - The current basis of differentiation may become less important for customers.
     - The value created by differentiation may not be sufficient for the cost of it to the
customer.
     - A focuser may out-differentiate the differentiator.

Focus - is a strategy that focuses on a narrow geographic or customer market or product

range such as niches. It can be differentiation based or cost based. There are several ways to
achieve a focus strategy:
     - Narrow product line.
     - Customer segmentation.
     - Geographic segmentation.
     - Focused functional capability.
     - Keeping costs down for a particular area of customer group.

The main risk of a focus strategy is that, when market growth is slow, the broad market
competitors will seek to enter the focuser’s niche in search of growth. The other risk is that,
like the differentiator, the value offered by the focuser is less than the cost differential, so
customers may revert to broad market competitors.

Low cost - is a strategy that aims to achieve the lowest cost delivery to the customer. It can
be achieved in the following ways:
     - Economies of scale and scope. - Simple product design.
     - Experience/learning curve. - Cost control.
     - Technology advantage. - Location advantage.
     - No-frills product. - Production innovation.
     - Purchasing cheap assets. - Government subsidy.

Low costs do not mean cost control. Many confuse a low-cost strategy with the more
general management issue of cost control. All organisations are interest in cost control, that
is, keeping costs down and ensuring that costs are around the level expected or budgeted.

Risks of a low-costs strategy include that the organisation may be too narrowly focused on
cost control at a time when customers begin to seek higher levels of service. A second risk is
that lowest cost cannot be sustained as another competitor may innovate and be able to
reduce costs below those of the existing cost leader. A third risk is that organisations
competing with a focus strategy may be able to offer even lower costs to particular
segments.

Leader strategy - strategy that combines low-cost delivery, and a basis of product or service
differentiation. Partially due to the evidence from the total quality management (TQM)
movement, it is argued that quality does not cost money, but rather saves money. 
—> However, the risk of leader strategy is that it is difficult to concentrate on both
differentiation and low cost simultaneously. 
—> A more common variant on the leader strategy is the best costs/value for money
strategy, which trades off lowest cost for some features of differentiation, but does not try
to achieve either lowest costs of highest differentiation. 

Another approach to generic strategies is that there are three ways in which industry
leaders creates greater value for their customs than did they competitors. These are:
     1. Operational excellence - strategy that provides value chain efficiency and
effectiveness, particularly in the production areas, but not a better product. 
     2. Customer intimacy - strategy that focuses on anticipating customer needs through a
deep and personal relationship with the customer over time.
     3. Product leadership - strategy that offers a stream of new product developments and
innovations through a research and development (R&D) approach.

Porter argued that organisations that did not choose a clear generic strategy risked being
‘stuck in the middle’ and would be unable to outperform their competition. How is this
different from ‘best cost’, which also represents a compromise between differentiation and
cost? ‘Best cost’ is a clear choice that is sought out, while ‘stuck in the middle’ is an outcome
that occurs due to a lack of clarity of business strategy and/or inconsistency in
implementation.