Business Strategy Tutorial for MSFA students in Alliances & Acquisitions

1. Business Strategy Tutorial for MSFA students in Alliances & Acquisitions Dave Garten daveoutside@alum.mit.edu

2. What is a Strategy? “plan of action designed to achieve a particular goal” – Wikipedia • Strategy statement – 2 parts • The objective + the “how” • Fictional examples for Nissan • Market: Achieve #1 market share in electric vehicles by 2012 by introducing the “Leaf” and selling 500,000 units. • Financial: Achieve positive operating margin on the Leaf by 2012 by driving down battery cost to $200/watt. Dave Garten – Business Strategy

3. “Basis of Competition” External Analysis Internal Analysis “What we have” Strategy Development R & D Supply Mftg Sales Mktg Strategy Mission Coordinated action (tactics) “Translation of Strategies” Frequency Dave Garten – Business Strategy

4. External - Industry Structure High Monopoly Oligolpoly Monopolistic Competition Strategy Flexibility Profitability Pure Competition Low Low High Degree of Competition Source: Derived from Barney, Gaining & Sustaining Competitive Advantage Dave Garten – Business Strategy

5. Mature • Quality & reliability Declining • Price Growth • service Emerging • Features Product innovation Process innovation External - Industry Structure Late Majority Early Majority Early Adopters Laggards Innovators Dave Garten – Business Strategy

6. External–Trends/Environment - “PESTAL” • Political • Telecom, deregulation, govt ownership, trade barriers, subsidies, free speech, etc. • Economic • Income, spending, interest rates, GDP, stock mkts, etc. • Sociocultural • Demographic, psychographic, education, etc. • Technological • New standards, new processes, new features, etc. • Environmental • International pressure groups, env. laws, waste regulations • Legal • Intellectual property, antitrust, etc. Dave Garten- Business Strategy

7. External - Structural Opportunities • Fragmented -> consolidation • Emerging -> TTM, locking up resources, tech switching cost • “Network” -> standards, n**2 • Mature ->incremental innovations, service • Declining ->shakeout leadership, niche, divest Source: Derived from Barney, Gaining & Sustaining Competitive Advantage Dave Garten- Business Strategy

8. Horizontal Vertical External - Industry StructureThreats - Applying Porter’s 5 Forces • Threat of Entry • Economies of scale (production, distribution), Product differentiation (brand, switching costs), other cost advantage (know-how, patent, access to raw materials, location), contrived deterrence, govt • Threat of Rivalry • # of competitors, size/influence of competitors, industry growth rate, level of differentiation (vs. price), step function of capacity • Threat of substitutes • Deliver the product/service in a different way? • Suppliers • Bargaining power, # of companies, level of differentiation, threat of vertical integration, threat of substitutes • Customers • Mirror image of suppliers Source: Derived from Barney, Gaining & Sustaining Competitive Advantage Dave Garten- Business Strategy

9. Internal – Strength/Weakness • Value chain analysis – varies by firm… Customer Sales & Marketing Service Distribution Manufacturing Development Research Dave Garten- Business Strategy

10. Internal - Core Competence collective learning that coalesce around individuals who coordinate a comprehensive set of diverse skills & integrate multiple streams of know-how • Defined: • What can a company do w/its core competence? • Delivery of new products, services, alliances • Expand into related products and businesses • Shape future markets • Examples: Canon, HDTV, 3M, Honda Source: derived from The Core Competence of the Corporation, by C.K. Prahalad and Gary Hammel, HBS, 1990. c Dave Garten- Business Strategy

11. Diversification (<1%) Step 3 (7%) Step 2 (26%) Step 1 (38%) Core Core Competency and Success Source: Bain, October 2003 Dave Garten- Business Strategy

12. Core Strategies - Differentiation “increase in perceived value relative to the perceived value of other firms” - Barney “If you can’t differentiate yourself in this world, you get commoditized instantaneously. So we are constantly driving for more innovation, more differentiation and more technology.” - Jeffrey R. Immelt, Chairman and CEO, GE Dave Garten - Business Strategy

13. Core Strategies - Differentiation • Why differentiate? • Ways to differentiate • Organizing for differentiation • Better chance to be profitable • Preference -> loyalty -> stickiness -> profitability (basis for monopolistic competition) • Brand, features, services, bundled solutions, timing, location, distribution, customization, technology Dave Garten - Business Strategy

14. Core Strategies - Cost Leadership • Manufacturing businesses • Conventional: High MSS -> High accumulated volume  low unit cost -> high profitability • Experience curve (learning), know-how, IP, specialization, improvements • Service businesses • Know-how; experience curve applies • Cost structure • Labor, capital, land, raw materials, geography, use of technology, government policy • Organizing for cost leadership Source: Derived from Barney, Gaining & Sustaining Competitive Advantage Dave Garten - Business Strategy

15. Core Strategies - Vertical Integration • Degree of control over value chain • Forward integration  toward customer • Backward integration  toward R&D Vertical Integration Market Governance Alliances • Control • Supply certainty • Dilution of CC • Antitrust • Secrecy • Flexibility • Market efficiency • Focus on CC Dave Garten - Business Strategy

16. Strengths (S) Weaknesses (W) 1. 2. . . 1. 2. . . SO Strategies WO Strategies Opportunities (O) Overcome weaknesses by taking advantage of opportunities Use strengths to take advantage of opportunities 1. 2. . . ST Strategies WT Strategies Threats (T) 1. 2. . . Minimize weaknesses and avoid threats Use strengths to avoid threats Strategy Evaluation Tool SWOT & Strategy Development Source: Strategic management by Fred R. David Dave Garten- Business Strategy

17. What is Good Strategy? • How do you know a good strategy when you see it? • Will have many of these qualities: X Dave Garten – Business Strategy