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MM5012 Business Strategy 08.00 17.00 SBM ITB Jakarta Progra m

Business Leadership Executive

Lecture Dr. Ir. Mohammad Hamsal, MSE, MQM, MBA Amol Titus, MBA r Assignment number Assignment title/topic/case Integrated Paper Due date March 9th , 2013

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Introduction to Strategic Management

Strategy is an integrated and coordinated set of commitments and actions designed to exploit core competencies and gain a competitive advantage (Ireland et al. 2011). So what is strategy? Based on my understanding from the class, strategy is a set of action below: 1. Positioning an organization for competitive advantage 2. Deciding what to do and what NOT to do (making choices of Who What How) 3. Creating value for shareholders and other stakeholders by providing value to customers Thus, the main and primary goal of business strategy is to achieve a sustainable competitive advantage (SCA). Competitive advantage can be achieved if the firm implements strategy that competitors are unable to duplicate or find too costly to imitate. To create a sustainable and competitive advantage, a firm must create value to its customer. Then, a strategy must be built based on few parameters (Henry 2011):

Who should the company target as customers? What products or services should the company offer the targeted customers? How can the company do this efficiently?

To define a good strategy, the firm needs to consider the components inside and outside the firm itself. These elements are:

Vision statement: represents a desired state that the organization aspires to achieve in the future. Mission statement: seeks to answer the question why an organization exists. Values statement: organizations essential and enduring tenets which will not be compromised for financial expediency and short-term gains. Key success factors: elements in the industry which keep customers loyal and allow the organization to compete successfully.
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Operating goals & metrics: tools for measurement and guidance in day-to-day activities. Strategic leaders: a firm needs to have a leader who can inspire his team to achieve goal and behave according to firms values.

In practice, there are 3 forms of strategy depend on the level impacted (Henry 2011): Corporate strategy is concerned with what industries the organization wants to compete in. Business strategy or competitive strategy deals with how an organization is going to compete within a particular industry or market. Functional strategy deals with decisions according to functional lines such as R&D and finance.

There are 5 indicators to show that the firm has a good strategy or not. These indicators are:

There is a unique value proposition compared to competitors A different and tailored value chain Clear trade-off and choosing what to do & not to do Activities that fit together and reinforce each other Continuity of strategy with continual improvement in realization

If the organization succeeds to implement a good strategy, it will result in above average returns. It is a return in excess of what investor expects in comparison to other investments with similar risk. 2 Strategy Diamond Model

In selection of strategy, it should focus on arena, vehicle, differentiator, staging and economic logic. These are called Strategy Diamond Model (Hambrick, et al, 2001). For more information on Strategy Diamond Model, please refer to Exhibit 1. One thing to remember, when defining a strategy, it needs to be backed up with high level data to give a clear direction on where to drive the strategy. Detailed data analysis can be done on the next step, a business plan phase. Overall, the right flow is defining strategy choosing the right business model detailing the business plan (operation plan, sales & marketing plan, production plan, logistic plan, financial plan, etc usually short term in yearly basis).

Business Model Development

A business model is a reflection of the firms realized strategy (Casadesus-Masanell et al, 2010). By definition, business model is a framework by which firm can generate profits. So what is the relationship between strategy & business model? What differentiates strategy compare to business model? Strategy is all about how to beat the competition while business model is about how to generate profits. When defining a business model, the firm must consider how to create value to customers (value creation) and how the value can generate reward for the firm (value capture).

Looking at business model, there are 4 elements of business model creation (Johnson et al, 2008): Customer value proposition (CVP): A successful company is one that has found a way to create value for customers that is, a way to help customers get an important job done. Profit formula: The profit formula is the blueprint th at defines how the company creates value for itself while providing value to the custome r. Key resources: The key resou rces are assets such as the peopl e, technol ogy, product s, facilitie s, equipmen t, channel s, and brand requi red to deli ver the value pro position to the targeted custome r. Key processes: Successfu l companie s have ope rational and manageria l processe s that allow the m to deli ver value in a way they can successfull y repe at and inc reas e in scale.

Business model refers to the logic of the firm, the way it operates and how it creates value for its stakeholders and Strategy refers to the choice of business model through which the firm will compete in the marketplace; while Tactics refers to the residual choices open to a firm by virtue of the business model it chooses to employ. The relationship between strategy, business model and tactics are shown in below figure.

Exploring General & Competitive Environment

To keep sustainably competitive in the market, the organization needs to consider factors from external environment. These factors could come from political, economical, social and technological angle. Looking at the industry in specific, there are also external factors such as new entrants, power of buyers, substitute products, power of suppliers and competitive rivalry as mentioned in Porters Five Forces Framework. When looking at the general environment, the organization is trying to identify the possible changes due to factors from outside the industry but can affect business activities. Organization needs to continuously scan and monitor their general environment to identify signals that can affect the industry. Some tools that can help organization to analyze the general environment (Henry 2011):
1. Scenario planning

There are 5 steps in defining the scenario planning: identify key focal issue, identify the driving forces around this issue, develop scenarios based on the most important driving forces, describe implications for each scenario and identify early warning signals for each possible scenario. There are some limitations for this approach. It is very subjective and highly dependent to managers inside the organization. Thus, the accuracy of the scenarios remains questionable.
2. PESTLE analysis

Organizations approaches to analyze the general environment from Political, Economic, Social, Technological, Legal and Environmental aspects (PESTLE). There are some limitations on this approach. There should be some implications associated with organizations environment and the rate of changes or uncertainties are limiting the use of this analysis alone. 3. SWOT analysis This analysis is referring to strengths and weaknesses from internal while opportunities and threats from external. Later on in this section, we will see some limitations on this approach. When looking at the competitive environment, the organization is trying to identify the factors inside the industry and how to achieve competitive advantage. Some usable tools are (Henry 2011):
1. Porters Five Forces Framework: It is a tool to analyze the attractiveness of an industry based on

the strengths of five competitive forces. These 5 competitive forces are:

Threat of new entrants. There are some barriers for a new entrant to enter the industry like economies of scale, product differentiation, and capital requirements, switching costs, access to distribution channels and cost advantages from competitor independent of size.

Bargaining power of buyers. Buyers (customers) are powerful when they purchase a large portion from industrys output, purchased products account for a significant portion of sellers annual revenues, they could switch to another product and there is no differentiation.

Bargaining power of suppliers. A supplier group is powerful when they are dominated by few large companies, substitute product is not available, industry firm is not a significant customer for supplier group, supplier goods are critical for buyers success, it has a high switching cost, and supplier is a threat to integrate forward to buyers industry.

Threat of substitute products and services. Substituted products are strong threat when customers face few switching costs, substitute product price is lower and substitute product quality is equal or greater than the competing product.

Intense rivalry among competitors. Intensity of rivalry is strong when competitors are numerous or equally balanced, it has a high fixed costs, lack of differentiation, competitors have an extra capacity and competitors have high exit barriers.

2. Value Net. Value net represents a map of the competitive game, the players in the game and

their relationship to each other. By showing relationship of each player in the industry, Brandenburger and Nalebuff (1995) introduce a new player called complementor. This could be an addition to Porters 5 Forces Framework. This is shown in Exhibit 3.
3. Value Chain Analysis. Value chain analysis is one of the tools which can help to assess

organizations resources and in so doing determine its strengths and possible weaknesses. It consists of primary activities and support activities like shown in Exhibit 4. Primary activities are activities which are directly involved in the creation of a product or service. Support activities are activities which ensure that the primary activities are carried out efficiently and effectively. An organization can start doing SWOT analysis after the audit of external and internal environment have been completed. In formulating strategy, an organization should seek to match its strengths and weaknesses to opportunities and threats. Some limitations of SWOT analysis (Henry 2011): It produces very lengthy lists which can have the same weight. There is no prioritization. Strengths and weaknesses cannot be translated directly to opportunities and threats. Ambiguity same factor can be recognized as both strength and weakness at the same time. The same factor can be also recognized as threat and opportunity at the same time
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The analysis may be too focused on industry boundary and miss signals from external which can change the industry structure.

In the case of Movie Exhibition Industry, we can see that the external and competitive environment is playing a significant role in the overall competition. The box-office revenue cannot be increased due to lots of substitute products like home-theater, DVD etc. The exhibitors are trying very hard to innovate further by increasing customer experiences which includes upgrading the facilities into 3D and sound-proof technology, setting up lounges and entertainment centers inside the theater facility. While in the case of Apple, their core competency is innovation. That is their value differentiation and that what makes them sustainable and have competitive advantages compare to their competitors. The culture to innovate inside Apple is something that is valuable, rare, costly to imitate and for sure there is no substitute. These attributes are Apple differentiation. 5 Creating Business Level Strategy

Business level-strategy is an integrated and coordinated set of commitments and actions the firm uses to gain a competitive advantage by exploiting core competencies in specific product markets/industry (Ireland et al. 2011). Strategic competitiveness results only when the firm satisfies a group of customers by using its competitive advantages as the basis for competing in individual product markets. Effectively managing customer relationships helps the firm answer questions related to the issue of who, what & how. As part of strategy formulation, Grant proposes a framework which consists of five stages (Ireland et al. 2011): 1. Identify and classify organization resources. Emphasize on strengths and identify opportunities for better resource
Strategy Values

utilization. 2. Identify organizations capabilities. How it can do better than competitors.

3. Identifying sustainable competitive advantage by emphasizing

Rare Competitive Advantage

Costly to imitate Non Substitute

on organization resources that are: valuable, rare, costly to imitate and non-substitute. 4. Select a strategy which best exploits organizations resources and capabilities. 5. Identify whether any resource gaps exist which need to be filled.

Capabilities

Resources

The purpose of a business-level strategy is to create differences between the firms position and those of its competitors. To position itself differently from competitors, a firm must decide whether it intends to perform activities differently or to perform different activities (Ireland et al. 2011). Firms choose from among several types of business-level strategies to establish and defend their desired strategic position against competitors (Ireland et al. 2011):
1. Cost leadership: is an integrated set of actions taken to produce goods or services with features

that are acceptable to customers at the lowest cost, relative to that of competitors. For example of value creating activities associated with cost leadership strategy see exhibit 6. There are also competitive risks of this strategy. They are: Innovations by competitors can quickly eliminate cost advantage Too much focus on cost reduction versus competitive levels of differentiation Competitors may learn how to successfully imitate a cost leaders strategy

2. Differentiation: is an integrated set of actions taken to produce goods or services (at an

acceptable cost) that customers perceive as being different in ways that are important to them. For example of value creating activities associated with differentiation strategy see Exhibit 7. There are also competitive risks of this strategy. They are:

Can charge too high of a price premium Differentiation theme no longer valuable to customers Over-differentiating. Customer experience shows differentiation not worth the cost Counterfeiting

3. Focus Strategy: is an integrated set of actions taken to produce goods / services that serve the

needs of a particular competitive segment. It can be focus on cost or focus on differentiation. The competitive risks of this strategy are: competitor can out-focus the firm (competitor focuses on a more narrowly defined segment) attract many competitors on the same attractive segments Customers may decide that the cost of uniqueness is too great Competitors may learn how to imitate Value Chain The means of uniqueness may no longer be valued by customers

4. Integrated cost leadership / differentiation: strategy that involves engaging in primary and

support activities that allow a firm to simultaneously pursue low cost and differentiation. The example of this firm is Singapore Airlines. This is contradicting with 5 forces of Porter whereas there should be a tradeoff by choosing one strategy and loses competitive advantages on the

others. 3 sources of flexibility that is useful for firms to executing dual strategy (cost reductions and continuous enhancements): Flexible manufacturing system: computer based process to produce a variety of products. Information networks: using technology to link suppliers, distributors and customers. Total Quality Management (TQM) systems: emphasizes firms total commitment to the customer and continuous improvement of every process through data driven, problem solving approaches based on empowering employees. There is also a possibility that firm executes dual strategy due to the product differentiation has no more room to improve while the competition is becoming fierce. Thus, the firm needs to be aware of the cost and starting to go into cost leadership strategy. The result is the firm will execute dual strategies at the same time and getting stuck in the middle between dual strategies (cost structure is not low enough for attractive pricing and product is not sufficiently differentiated enough to create value for target customer). 6 Strategic Acquisition and Restructuring

One of the strategic moves in a business strategy is to acquire or to merge with another firm. A merger is a strategy through which two firms agree to integrate their operations on a relatively coequal basis (Ireland et al. 2011). An acquisition is a strategy through which one firm buys a controlling, or 100 percent, interest in another firm with the intent of making the acquired firm a subsidiary business within its portfolio (Ireland et al. 2011). A takeover is a special type of acquisition wherein the target firm does not solicit the acquiring firms bid; thus, takeovers are unfriendly acquisitions (Ireland et al. 2011). Some reasons for a firm to do acquisitions:

Increased market power Overcoming entry barriers Cost of new product development and increased speed to market Lower risk compared to developing new products Increased diversification. Acquisitions are the easiest way to expand firms portfolio. Reshaping the firms competitive scope. With acquisitions, a firm can reduce the effect of rivalry and remove its dependencies on a single supplier. It will alter the market. Learning and developing new capabilities

Acquisitions can increase competitiveness and help firm achieving success. However, acquisition also has its own problem. Below are some problems in achieving acquisition success (Ireland et al. 2011):

Integration difficulties: the most important determinant of shareholder value creation in M&A. Inadequate evaluation of target: due diligence for acquirer to evaluate a target firm. Large or extraordinary debt: High debt can have several negative effects on the firm. Inability to achieve synergy: A firm ability to account for costs that are necessary to create anticipated revenue and cost based synergies affects its effort to create private synergy. Too much diversification: firms can become over-diversified. Managers overly focused on acquisitions Too large: The additional costs required to manage the larger firm will exceed the benefits of the economies of scale and additional market power.

The reasons and its problem on achieving successful acquisitions are shown in Exhibit 8. There are some attributes that the firm must have in order to have a successful acquisition. These attributes are depicted in Exhibit 9. While acquisition is more on the external, there is also an internal strategy that the firm can do to increase its competitiveness. Restructuring is a strategy through which a firm changes its set of businesses or its financial structure (Ireland et al. 2011). There are 3 types of restructuring strategies (Ireland et al. 2011):

Downsizing: is a reduction in the number of a firms employees and sometimes in the number of its operating units, but it may or may not change the composition of businesses in portfolio. Down-scoping: refers to divestiture, spin-off, or some other means of eliminating businesses that are unrelated to a firms core businesses. Leveraged buyouts: is a restructuring strategy whereby a party (typically private equity firm) buys a firms asset in order to take the firm private. Firms stock is no longer traded publicly.

Each of above alternatives can have its own short-term and long-term outcomes. For showing the possible outcomes from these alternatives, we can refer to Exhibit 10. 7 Competitive Strategy & Strategic Alliance

Lets take for example PT. Telkom Tbk that has done a major transformation on 2008 - 2009. It has completely transformed itself from being just a telecommunication provider to become a lean, competitive and innovative multimedia enterprise. It is applying dual strategies which are cost

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leadership (by cutting down its personnel expense from 30,000 to 15,000 personnel) and technology differentiation (by diversifying its portfolio which complement its core business). One proof point of this differentiation by diversification is shown in Telkom recent subsidiaries in multimedia domains in Exhibit 11. A different strategy has been done by Honda where it is focusing on innovation. It allows R&D employees to be creative and come up with a new idea even if the idea is not complementing its core business. This differentiation in R&D innovation also has its own problems. Thats why along the way, Honda restructured its project approach by still using R&D as innovation engine but when it comes to execution, they give the mandate to business unit. In this case you can see differentiation strategy supported by internal restructurization. 8 Lesson Learned

Strategy is sometimes missed-interpret by most of the people. They use the jargon strategy to emphasize how important the message that they are trying to relay. However with this course, I learned that strategy is not just some fancy keyword, it a whole set of activities that initiate a business. It sets a direction of where to go for organization. It chooses which business model that the organization should use. It defines the tactics to run the chosen business model. I learned from this course that the organization needs a strategy in order to be competitive in the market. As mentioned in above passage that the main purpose of business strategy is to achieve a sustainable competitive advantage (SCA). Based on my observation in case studies and discussions, product innovation sustains less than process innovation since product is easily imitated compare to process. To define a strategy, an organization should first look into arena, vehicle, differentiators, staging and economic logic. These are what they called as Strategy Diamond Model. When defining a strategy, the organization should first consider external & internal environments. There are several tools that can be used for analyzing general environment such as scenario planning, PESTLE analysis & SWOT analysis. Looking deeper into the industry itself, the organization should also analyze its competitive environment. For this, we can use tools such as Porters 5 Forces Framework, Value Net and Value Chain Analysis.

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Internally, the organization must understand its resources and its core competencies first as competitive advantages (values, rare, costly to imitate and non-substitute). Organization can then choose to perform activities differently or to perform different activities. There are several types of business level strategies that the organization can choose like cost leadership, differentiation strategy, focused strategy and integrated strategy. Organization can choose dual strategies like cost leadership and differentiation. Other strategies like merger, acquisitions, take-over and restructuring are worth considering for achieving sustainable competitive advantage. After defining a strategy, an organization can start choosing the right business model. The business model creation itself has four important elements. They are value propositions, profit formula, key resources and key processes. These elements are the tools for business model creation. Finally, I learned that all of those tools mentioned above are very useful to help us defining a strategy in order to remain competitive. These tools need to be used together and to complement each other, not to be used alone. Each tool has its own benefits and limitations. By combining all tools together, the organization can have a full visibility for defining a strategy. At the end of the day, the main objective is to achieve sustainable competitive advantage (SCA).

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Exhibit 1. Strategy Diamond Model

Exhibit 2. Porters Five Forces Framework

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Exhibit 3. The Value Net

Exhibit 4. The Value Creating Activities

Exhibit 5. Five Business-Level Strategies

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Exhibit 6. Examples of Value Creating Activities Associated with the Cost Leadership

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Exhibit 7. Examples of Value Creating Activities Associated with the Differentiation Strategy

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Exhibit 8. Reasons for Acquisitions and Problems in Achieving Success

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Exhibit 9. Attributes of Successful Acquisitions Attributes 1. Acquired firm has assets or resources that are complementary to the acquiring firm's core business 2. Acquisition is friendly 3. Acquiring firm conducts effective due diligence to select target firms and evaluate the target firm's health (financial, cultural and human resources) 4. Acquiring firm has financial slack (cash ir a favorable debt position) 5. Merged firm maintains low to moderate debt position 6. Acquiring firm has sustained and consistent emphasis on R&D and innovation 7. Acquiring firm manages change well and is flexible and adaptable Exhibit 10. Restructuring and Outcomes Results 1. High probability of synergy and competitive advantage by maintaining strengths 2. Faster and more effective integration an possibly lower premiums 3. Firms with strongest complementarities are acquired and overpayment is avoided 4. Financing (debt or equity) is easier and less costly to obtain 5. Lower financing cost, lower risk (e.g. of bankruptcy) and avoidance of trade-offs that are associated with high debt 6. Maintain long-term competitive advantage in markets. 7. Faster and more effective integration facilitates achievement of synergy

Exhibit 11. PT Telkom Tbk and Subsidiaries.

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References

Apple Inc.: Keeping the i in Innovation [Ireland et al. (2013), Case#2] Casadesus-Masanell, R. & J. E. Ricart (2010). From Strategy to Business Models & onto Tactics. Long Range Planning. 43. Hambrick, D. C. & J. W. Fredrickson (2001). Are You Sure You Have a Strategy? Academy of Management Executive. 15(4). Henry, A. E. (2011). Understanding Strategic Management. 2nd Edition. Oxford University Press. Heracleous, L. & J. Wirtz (2010). Singapore Airlines Balancing Act. Harvard Business Review. July-August. Inside Hondas Brain [Fortune, March 17, 2008] Ireland, R.D.; R.E. Hoskisson & M.A. Hitt (2011). The Management of Strategy: Concepts and Cases. 9th Edition. South-Western Cengage Learning. Johnson, M. W.; C. M. Christensen & H. Kagermann (2008). Reinventing Your Business Model. Harvard Business Review. December. PT Telkom Tbk [Globe Asia, September 2010] The Movie Exhibition Industry: 2011 [Ireland et al. (2013), Case #19]

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