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4/1/14
1
Strategy Master Class for
Woxsen School of Business
Hyderabad, March 30. 2014
Sessions 1 & 2
Baba Prasad (Ph.D., The Wharton School)
CEO, Vivékin Group, Inc.
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© 2013, Vivékin Group. Confidential 2
Session 1: Strategic Planning
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An Economics Preamble
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© 2013, Vivékin Group. Confidential
The Firm
What is a Firm?
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Inputs Outputs The Firm
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© 2013, Vivékin Group. Confidential
What is a Firm?
v Concerns of the Firm u Value Addition u Operational Efficiency u Marketing/Branding u Pricing
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Outputs Inputs
The Firm v Basic Equation
P = R – C Profits = Revenues – Costs
A Short History of Strategy
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© 2013, Vivékin Group. Confidential
Early Thinking about Strategy
v 500 BC Greece: “strategy is what a strategos (commander-general) does” stratos (army) + agos (leader)
v Strategy had military underpinnings for for more than 2000 years
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The Industrial Revolutions
v The First Industrial Revolution (mid-18th to mid-19th centuries) u Strategic thinking not much
importance u Chaotic business markets u Adam Smith: Market forces form
“an invisible hand” over which individual firms have no control; hence no need for strategy
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© 2013, Vivékin Group. Confidential
The Industrial Revolutions
v The Second Industrial Revolution (mid-19th to early-20th centuries) u Emergence of railroad creates
mass markets u By early 20th century, huge
“vertically integrated” organizations u Alfred Chandler: the “visible hand”
of managers who could shape markets
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© 2013, Vivékin Group. Confidential
Large Companies
v The BIG-3 automakers
v Alfred Sloan of GM did SWOT analysis of his competitor, Ford
v Chester Barnard, President of New Jersey Bell managers should pay attention to “strategic factors”
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The Origins of Strategy Frameworks
v In the 1960s, Business Schools began to teach how to match u “distinctive competences”
q “Strengths and Weaknesses” u “external market forces”
q “Opportunities and Threats” u “SWOT” analysis
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Debate over SWOT
v SW: short-term or long-term?
v Should SW-analysis be aimed to create and deliver new products or serve the customer?
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Igor Ansoff’s Product/Mission Matrix
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Market Penetration Product Development
Market
Development
Diversification New Mission
Present Mission
Present Product New Product
“common thread”
© 2013, Vivékin Group. Confidential
Boston Consulting Group (BCG)
v 1965-66 : Why do some competitors outperform others who seem similar?
v Experience Curves u Doubling of cumulative experience
leads to 20-30% reduction in costs
v Applied this to Product Portfolio analysis
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BCG’s Growth-Share Matrix
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Other Methods of Portfolio Analysis
v McKinsey consulting with GE developed the
GE/McKinsey 9-block matrix
v 1973 oil crisis: American companies became more short-term focused than long-term
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Critiques of Portfolio Analysis
v Analytic methods propose detached solutions that do not generate the insights that hands-on experience does
v too short-term focused to propose strategic solutions
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Michael Porter
v US companies had begun to like studying competition
v Harvard economists in the 1970s u Understand industry structure for its
impact on profitability, efficiency and innovation
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Threat of Substitute Products or Services
Threat of New Entrants
Rivalry Among Existing Competitors
Bargaining Power of Suppliers
Bargaining Power of Buyers
Michael Porter’s Five Forces
© 2013, Vivékin Group. Confidential
The Three Generic Strategies – Creating a Business Focus
v Organizations typically follow one of Porterʼ’s three generic strategies when entering a new market
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The Three Generic Strategies – Creating a Business Focus
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© 2013, Vivékin Group. Confidential
Industry Analysis Activity (20 mins)
v What position did Ben & Jerry’s adopt in the market?
v Analyze the industry using Porter’s five forces framework
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© 2013, Vivékin Group. Confidential
Positioning
v Differentiation u High Quality u High-Price u Social responsibility o Fair trade
u Fun!
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© 2013, Vivékin Group. Confidential
Intense Rivalry in Super-premium ice cream industry
v Primary competitors include Dreyers and Haagen-Dazs
v Large, diversified companies with significantly greater resources than Ben & Jerry’s;
v Numerous competitors
v Low cost of switching to rival brands
v Dreyers and other rivals employ sales-increasing tactics
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Buyer Power: Low/High
v Power of individual customers low
v Power of grocery stores, convenience stores, and restaurants high
v Large retailers have substantial leverage over price
v Buyers’ cost of switching to competing brands is relatively low
v Ben and Jerry’s strategy must include strong product differentiation to increase switching costs for buyers.
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© 2013, Vivékin Group. Confidential
Supplier Power: Moderate
v Dairy farmers, paper container manufacturers, and suppliers of various flavorings
v Moderate competitive force u the ice cream industry is a major
customer u multiple suppliers to choose from u suppliers’ viability is tied to the well-
being of large, established companies
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Threat of New Entrants: Moderate
v Barriers to entry in the ice cream industry are moderate u brand preferences and customer loyalty
toward established companies u Strong brand loyalty u Capital intensive o specialized mixing facilities and
manufacturing plant u Distribution channels can be difficult to
establish for an unknown firm
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© 2013, Vivékin Group. Confidential
Threat of Substitutes: High
v Many substitutes u cookies, pies, Popsicles, cake
v Switchover costs low
v Strategy: to defend premium category
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© 2013, Vivékin Group. Confidential 31
Session 2: Entrepreneurial Strategy
© 2013, Vivékin Group. Confidential
Some Unfinished Business, First
v Critiques of Porter’s Framework u Too externally-oriented u Firm has no agency
v Late 1980s-Early 1990s u The Resource-Based View (RBV) of
the firm
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© 2013, Vivékin Group. Confidential
The Resource-Based View
v Firm is a collection of “resources” u Resources are “anything which
could be thought of as the firm’s strengths or weaknesses”
u Resources provide “competitive advantage”
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© 2013, Vivékin Group. Confidential
RBV & Sustained Competitive Advantage
v To provided sustained competitive advantage, a resource must be:
u Valuable u Rare u Inimitable u Non-substitutable
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V R I N
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© 2013, Vivékin Group. Confidential
Core Competence
v Resources enable capabilities and competencies
v Company must focus on its best competence— u core competence
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The Book and the Authors
Prof Renee Mauborgne
© JOHN ABBOTT
Prof Chan Kim
© JOHN ABBOTT
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© 2013, Vivékin Group. Confidential
New Market Space
v Red oceans and blue oceans make up market universe
v Red oceans: all industries in existence
= known market space
v Blue oceans: all industries not in existence
= unknown market space
© 2013, Vivékin Group. Confidential
Red Oceans vs. Blue Oceans v Red oceans
u Industry boundaries defined and accepted u Competitive rules of game known u Companies try to outperform rivals; cutthroat competition u As market space gets crowded, prospects for profit and
growth reduced u Products become commodities u Red ocean strategy is a market-competing strategy
v Blue oceans u Undefined market space, demand creation, opportunity for
highly profitable growth u Most are created from within red oceans by expanding
existing industry boundaries u Rules of game waiting to be set u Competition irrelevant u Blue ocean strategy is a market-creating strategy
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© 2013, Vivékin Group. Confidential
The Impact of Creating Blue Oceans
© 2013, Vivékin Group. Confidential
Value Innovation: The Cornerstone of Blue Ocean Strategy
• Creators of blue oceans follow value innovation
• Value Innovation – Equal emphasis on value
and innovation – Defies value-cost trade-off
of competition-based strategy
– Successful value innovation: • Drives down costs while
driving up buyersʼ’ value • Uses a whole-system approach • Follows reconstructionist view
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The Six Principles of Blue Ocean Strategy
Formulation Principles Risk factor each principle attenuates
Reconstruct market boundaries Focus on the big picture, not the numbers Reach beyond existing demand
Get the strategic sequence right
" Search risk " Planning risk
" Scale risk " Business model risk
Evaluation principles Risk factor each principle attenuates
Overcome key organizational hurdles Build execution into strategy
" Organizational risk " Management risk
Example of a Blue Ocean Creation
The American Wine Industry
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What the industry offers
Premium Wines Budget Wines
Massive Choice
Polarised Strategic Groups
© 2013, Vivékin Group. Confidential
American Wine Industry v 3rd largest in world: worth $20 billion
v Californian makes 66% - the rest is from Italy, France, Spain, Chile, Argentina, Australia
v Exploding number of new wines – new vineyards in Oregon, Washington, New York
Customer base stagnant 31st in the world in per capita consumption!
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© 2013, Vivékin Group. Confidential
American Wine Industry
v Top 8 producers had 75% of the market; 1600 had the remaining 25%
v $ millions spent in marketing - Titanic battles – intense competition
v Severe price pressure
v The dominant growth strategy was towards premium wines – more complexity, better image, more prestigious vineyards, number of medals won at wine festivals.
© 2013, Vivékin Group. Confidential
What wine customers said
v “It is too confusing and complex”
u Wine descriptions and terminology
u The shopping experience
u The lack of clear guidance on what to buy and drink
v Thus, massively intimidating for ʻ‘noncustomersʼ’ (the large majority of the US population who were not wine drinkers)
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Segmentation of Market and Brands Low
Involvement High Involvement
Easy Going Enjoyers Aspirationals Appreciators Connoisseurs
• Glass with friends
• Least care choosing a wine
• Not wine preferrers
• Price is a strong influencer
• Everyday enjoyment • To relax/unwind • Stick with limited list of known brands • Choose in-store • Not interested in wine language
• Influenced by major brand advertising
• Image important • Wine preferrers (sic) • Varietal knowledge • Interested in some wine language • Enjoy trying new wines
• Visit wineries / read wine articles
• Want to discover wine • Knowledge of wine regions • Frequently buy >$10 wines • Join wine clubs • Don’t stick to known brands
• Ideal wine is complex & interesting
• Sophisticated drinker • Discerning wine tastes • Don’t decide in store • Have a cellar • Less influenced by specials/ promotions
• Actively pursue wine knowledge
Brand: Lindemans Rosemount Estate Wolf Blass Penfolds
Demographic: M/F: 50/50 Age: 35-49
M/F: 30/70; Age: 30-40
M/F: 70/30; Age: 35-50
Age: 40+
© 2013, Vivékin Group. Confidential
Strategy Canvas
High
Low Price Use of
enological terminology
Above-the-line marketing Aging
quality
Vineyard prestige and legacy Wine
complexity
Wine range
Budget Wines
Premium Wines
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© 2013, Vivékin Group. Confidential
What factors should be
eliminated that the industry has taken
for granted?
Eliminate
What factors should be reduced
well below the industry standard?
Reduce
What factors should be created that the industry has never
offered?
Create
What factors should be raised well beyond the
industry standard?
Raise
Four Actions to create a Blue Ocean
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© 2013, Vivékin Group. Confidential
Yellow Tail v Only 2 types initially – Chardonnay and Shiraz v Fruity, soft on palette, sweet-ish – great for those who
had not drunk wine before v Same bottle for red and white – low logistics costs v Simple vibrant packaging – lower case letters/
kangaroo v Un-intimidating v They were selling “The essence of a great land …
Australia” – ie they were not selling the wine v Australian clothing for the retail staff – they
enthusiastically promoted a wine they could understand.
© 2013, Vivékin Group. Confidential
Results
v No 1 imported wine (outsells France and Italy)
v Fastest growing imported wine in the history of the USA industry
u New consumers of wine
u Jug drinkers trade up
u Premium wine drinkers trade down
v Industry criticizes them mercilessly at first
Now wine press blurb gives it a “best buy” for value; winning wine awards.
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© 2013, Vivékin Group. Confidential 53
© 2013, Vivékin Group. Confidential
Blue Ocean Strategy Canvas Exercise (30 minutes)
v Your group is starting an ice-cream company
v Identify what the competition is and map the features on the strategy canvas
v Determine what your company will do to create a blue ocean
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© 2013, Vivékin Group. Confidential
What factors should be
eliminated that the industry has taken
for granted?
Eliminate
What factors should be reduced
well below the industry standard?
Reduce
What factors should be created that the industry has never
offered?
Create
What factors should be raised well beyond the
industry standard?
Raise
Four Actions to create a Blue Ocean
© 2013, Vivékin Group. Confidential
Entrepreneurial Strategy
v Marked by uncertainty more than risk
v Difference between risk, uncertainty, and deep uncertainty
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Cognitive Distribution of New Venture/Topline Decision Making
Effectual
Causal Low
Low High
High Expert Entrepreneurs
Experienced VCs
Angels
Organic Growth Leaders
Corporate Managers
Novice VCs
Novice Entrepreneurs
© 2013, Vivékin Group. Confidential
The 5 Principles of Effectuation
v #1 Bird in Hand Principle u Start with Who you are, What you know, &
Whom you know (not preset goals)
v #2 Affordable Loss Principle u Invest what you can afford to lose—extreme
case $0 (not expected return)
v #3 Crazy Quilt Principle u Built a network of self-selected stakeholders
(not competitive analysis)
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© 2013, Vivékin Group. Confidential
The 5 Principles of Effectuation (contd.)
v #4 Lemonade Principle u Embrace and leverage surprises
(not avoid them)
v #5 Pilot-in-the-Plane Principle u The future comes from what
people do (not inevitable trends)
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Non-predictive control
Co-create
Plan
Persist
Adapt Low
High
Low High
PREDICTION
CONTROL
= Non-predictive control
How do you control a future you cannot predict?
You co-create it through stakeholder commitments
Plan
Persist
Adapt
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© 2013, Vivékin Group. Confidential
Saras Sarashwathy, University of Maryland
v For more on effectuation, read Saras Saraswathy’s book, “Effectuation”
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© 2013, Vivékin Group. Confidential 62
www.vivekingroup.com