IX. Strategy of IB

Actions that managers take to attain the goals of the firm and achieving them, it is about success

there must be consistency on the plan, activities, and goals

Strategy tackles the bigger picture while tactic is more specific

(i.e. strategy: goals and plans to win a war, tactic: specific practices to win a battle)

managerial practices must be consistent with strategy

Profitability and profit growth

rate of return that the firm makes on its invested capital

the percentage increase in net profits over time

Reduce costs
Add value and raise prices

sell more products in existing markets

pursuing strategies to enter new market

They are differences in profitability depending on the sector you operate
There are big variations between industries in the same sector

Lower costs
Differentiation

V: value of product to an average consumer
P: price per unit
C: cost of production per unit
Naranja: customer surplus per unit
Rosa claro: profit per unit sold
V-C (naranja + rosa claro): value created per unit

Objective: understand the profit an INDUSTRY, not a firm

Forces:
Competitive Rivalry
Threat of substitute products
Threat of new entrants
Bargaining power of consumers
Bargaining power of suppliers

Industry growth: Is this industry growing, stable or stagnated?
Number of firms: Industry with few firms or many firms? Demand conditions (overcapacity)
Extent of exit barrier: investment that cannot be recover, if they are high firms will put an effort to stay and better their products
Product differentiation: Are products differentiated or not? Brand identity: Are the products of these firms characterized by brand reputation? No brand identity = more rivarly
Industry concentration: sum of market shares of large firms, tends to be lower when concentration is higher

Relative price performance of substitutes
Relative value of substitutes
Similarity of substitutes to industry products: the more similar = the more serious is the threat
Improvements in substitutes’ technology
Switching costs for customers to switch to the substitutes Number of substitutes: The bigger number of substitutes = bigger threat
Ability to access customers / distributors
Competitive conditions in substitutes’ industries: The more innovative substitutes = bigger threat

Economies of scale: difficult the entry of new firms
Lack of differentiation: easier to access
Capital requirements: new firm may need a big amount of capital
Cost to access distribution: Is it difficult to access the distribution channels used by firms?
Other cost disadvantages : how expensive is it to enter, more expensive, less attractive
Government policy: Is the industry regulated? Regulations for operating?
Break even point
Threat of retaliation: how aggressive are companies in the industry, more agressive=less attractive

Price sensitivity: Is price really important to them?
Bargaining leverage
Buyer concentration vs. industry concentration
Buyer volume: Fewer buyers - more negotiating power to be able to change prices
Buyer switching costs (when switching to another product): No switching costs = they can change more easily = less committed customers
Price/total purchases
Product differences
Brand identity
Relative ability of buyers to backwards integrate vs. ability of industry firms to forward integrate: Can buyers enter the industry and start competing with existing firms?
If they have big power, it will lower the prof. of firms

Supplier concentration: fewer suppliers = more negotiating power
Differentiation of product (inputs)
High switching costs for firms: suppliers have more power
Few substitute inputs
Importance & volume of supplier
Relative ability of suppliers to integrate forwards vs. ability of industry firms to integrate backwards

There are two dimensions: cost and value
Efficiency frontier: different positions that a firm can adopt with regard to cost and value
If you’re below the efficiency frontier: you have to improve
To achieve efficiency frontier you will need to increase value or cost

Source of advantage & scope of market
Firms that fail to choose a particular strategy get “stuck in the middle” and underperform

Differentiation: firms prefer to invest in increasing value by making different products or high-quality products

Cost leadership: firms prefer to invest in decreasing costs

Broad market: focus on many or all segments
Narrow market: focus on one or few segments

Internal resources
Distinctive competences

The ones that contribute on creation of value or reduction of cost
Research & development: come up with innovative products to sell
Production: necessary to deliver services or products, they can increase the value if the focus to better the product
Marketing & sales: understand pricing and deal with distribution, if well-communicated with R&D they can increase value
Customer services: interaction with consumers, if they make the consumer happy they can increase value

Information systems: enable good communication with other activities (R&D + Logistics), they can alter the efficiency and effectiveness with which a firm manages
Logistics: controls the flows of goods and components (production+ M&S)
Human Resources: promote, manage, hire, and track the performance (customer service)
Company infrastructure: where everything happens

Expanding the market

Location economies

Experience effects

Leveraging Subsidiary Skills

Bargaining power between consumers and firms (Porter’s 5 points)

Leveraging Products and Competencies
Start small and open new markets

Take goods or services developed home & sell the int.

performing a value creation activity in the opti- mal location for that activity
risks related to political trends and decisions

Systematic reductions in production costs that have been observed to occur over the life of a product.
Due to learning effects (learning by doing) and economies of scale (reducte unit cost by producing a large volume)

valuable skills are developed first at home and then transferred to foreign operations

Tastes and preferences

Adapt to locals

Infrastructure

Traditional practices

Adapt to the channels of distribution

Host-governments regulations and demands

To counterbalance: develop products for regions (i.e. LATAM or EU)

Lower the costs of value creation

Mainly when there is a competitive market where industry is cheap

Consumers are powerful and face low switching costs

International strategy (low - low)

Transnational Strategy (high -high)

Localization strategy (low cost red. - high local resp.)

Global standardization strategy (low local resp. - high cost red.)

Low competition, high innovation

Products that serve universal needs

No significant competitors

Don’t need a lot of adaptability

Taking products first produced for their domestic market and selling them internationally with only minimal local customization

very difficult to manage

most challenging situation: achieve competing goals

places conflicting demands on the company (i.e differentiate & reduce costs)

Tools: location economies, economies of scale, learning effects, local differentiation

provide a good match to tastes and preferences in different national markets

substantial differences across nations with regard to consumer tastes

still need to be efficient and, whenever possible, to capture some scale economies from their global reach

i.e. automobiles

increasing profitability and profit growth

pursue a low-cost strategy on a global scale

market a standardized product worldwide

Used to measure profitability

Return on Equity (ROE): sensitive to capital structure, use for FIRE ( finance, insurance, and real estate) industries

Return on Assets (ROA): Ignores capital structure, reflects demand and operational effectiveness. Used for manufacturing (asset heavy industries)

Return on Sales (ROS): used in sectors where key assets are intangible