The Strategic Management Frameworks

Arnoldo Hax

The Frameworks for Competitive Positioning

Porter Resource-Based View of the Firm The Delta Model

Porters Framework: Explaining the Profitability of a Business

Competitive Positioning Achieving sustainable competitive advantage

Industry Structure Factors affecting industry profitability

Strategy Formulation and Implementation Defining and executing the managerial tasks

Figure 5-1.
Barriers to Entry
Economics of scale Product differentiation Brand identification Switching cost Access to distribution channels Capital requirements Access to latest technology Experience and learning effects

Elements of Industry Structure: Porters Five- Forces

Rivalry among Competitors
Concentration and balance among competitors Industry growth Fixed (or storage) cost Product differentiation Intermittent capacity increasing Switching costs Corporate strategic stakes

New Entrants
Threat of New Entrants

Government action
Industry protection Industry regulation Consistency of policies Capital movements among countries Custom Duties Foreign exchange Foreign ownership Assistance provided to competitors

Barriers to Exit
Asset specialization OneOne-time cost of exit Strategic interrelationships with other businesses Emotional barriers Government and social restrictions

Industry Competitors

Suppliers

Bargaining Power of Suppliers Intensity of Rivalry Threat of Substitutes

Bargaining Power of Buyers

Buyers

Power of Suppliers
Number of important suppliers Availability of substitutes for the suppliers products Differentiation or switching cost of suppliers products Suppliers threat of forward integration Industry threat of backward integration Suppliers contribution to quality or service of the industry products Total industry cost contributed by suppliers Importance of the industry to suppliers profit

Power of Buyers
Number of important buyers Availability of substitutes for the industry products Buyers switching costs Buyers threat of backward integration Industry threat of forward integration Contribution to quality or service of buyers products Total buyers cost contributed by the industry Buyers profitability

Substitutes
Availability of Substitutes
Availability of close substitutes Users switching costs Substitute producers profitability and aggressiveness Substitute priceprice-value

Figure 5-5.

Porters Five-Forces Model Applied to the Pharmaceutical Industry in the Early 1990s
Barriers to Entry (Very Attractive)
Steep R & D experience curve effects Large economieseconomies-ofof-scale barriers in R & D and sales force Critical mass in R & D and marketing require global scale Significant R & D and marketing costs High risk inherent in the drug development process Increasing threat of new entrants coming from biotechnology companies companies

Bargaining Power of Buyers (Mildly Unattractive)

The traditional purchasing process was highly price insensitive: the consumer (the patient) did not buy, and the buyer (the physician) did not pay Large Power buyers, particularly plan sponsors and cost containment organizations, are influencing the decisions to prescribe less expensive drugs MailMail-order pharmacies are obtaining large discounts on volume drugs Large aggregated buyers (e.g., hospital suppliers, large distributors, government institutions) are progressively replacing the role of individual customers Important influence of the government in the regulation of the buying processes

Bargaining Power of suppliers (Very Attractive)

Mostly commodities Individual scientists may have some personal leverage

Intensity of Rivalry and Competition

Threat of Substitutes (mildly Unattractive) Generic and meme-to drugs are weakening branded, proprietary drugs More than half of the life of the drug patent is spent in the product product development and approval process Technological development is making imitation easier Consumer aversion to chemical substances erodes the appeal for pharmaceutical drugs Intensity of Rivalry (Attractive)
Global competition concentrated among fifteen large companies Most companies focus on certain types of disease therapy Competition among incumbents limited by patent protection Competition based on price and product differentiation Government intervention and growth of MeMe-too drugs increase rivalry Strategic alliances establish collaborative agreements among industry industry players Very profitable industry, however with declining margins
SUMMARY ASSESSMENT OF THE INDUSTRY ATTRACTIVENESS (Attractive)

Make a business in an attractive industry where you can excel; then excel by achieving a low cost of differentiation through unique activities
The Value Chain
Firm Infrastructure
Support Activities
Margin

Human Resource Management Technology Development Procurement

Inbound Logistics

Operations

Outbound Marketing Logistics And Sales

Service

Margin

Primary Activities

Source: This setup for the value chain was suggested by Michael E. Porter (1985).

Mercks Value Chain

Firm Infrastructure
Very strong corporate culture One of Americas best managed companies Superb financial management and managerial control capabilities Friendly and cooperative labor relations Strong recruiting programs in top universities Very lean structure Highly concerned about ethics, ecology, and safety

Human Resources Management

Excellent training and development Excellent rewards and healthhealth-care programs

Margin

Technology Development
Technology leader; developer of breakbreak-path drugs (e.g., Mevacor, Mevacor, Vasotec, Vasotec, Sinement Intensive R & D spending Strengthening technological & marketing capabilities through strategic , Astra, strategic alliances (DuPont (DuPont, Astra, and Johnson & Johnson) Fastest timetime-toto-market in drug discovery and drug approval processes

Procurement
Vertical integration in chemical products

Inbound Logistics

Manufacturing
Increasing manufacturing
flexibility and cost reductions Stressing quality and productivity improveimprovements Global facilities network

Outbound Logistics
Acquisition of Medco provides unique distribution capabilities and information technology support Medco is the number one mailmail-order firm

Marketing And Sales

Marketing leadership Large direct sales staff Global marketing coverage Leverage through Medco, Medco, including powerful marketing groups Medco IT infrainfrastructure & database, covering patients, physicians, & drug uses Strategic alliances

Service
Medcos service excellence has attracted major corporations and healthhealth-care organization as clients.

Margin

There are two ways to compete: Low Cost or Differentiation

The efficiency of the low cost providers cost structure allows pricing below the average competitor, which in the long run may put average competitors out of business. This is why the alternative to low cost needs to be differentiation, offering unique product attributes that the customer values and will pay a premium for. Best Product

Margin Margin

$/Unit

Margin

Cost
Average Player

Cost
Low Cost Player

Cost
Differentiation Player

However, the Total Customer Solutions positioning offers a possible preferred alternative by introducing significant cost savings (and/or revenue increases) to the customer

Best Product

Total Customer Solutions

Margin

Margin

Margin Margin

$/Unit

Cost
Average Player

Cost
Low Cost Player

Cost
Differentiation Player

Cost

Critical Elements in Porters Frameworks

Porter Focus of Strategic Attention Types of Competitive Advantage Industry/ Business Low Cost or Differentiation

Basic Unit of Competitive Advantage Activities

Porters Winning Formula

Pick a business in an attractive industry in which you can excel. Notice that Porters Framework stressed rivalry and competition. Therefore, an attractive industry is one in which we can achieve as close to a monopolistic position as possible. In turn, the message of the value chain is to achieve sustainable advantage by beating your competitors, if not in all, at least in those activities that are most crucial to competition. Strategy is War!

The Resource-Based View of the Firm Framework

Resources can be classified into three broad categories

Tangible assets are the easiest to value, and often are the only resources that appear on a firms balance sheet. They include real estate, production facilities, and raw materials, among others. Although tangible resources may be essential to a firms strategy, due to their standard nature, they rarely are a source of competitive advantage. There are, of course, notable exceptions.

Resources can be classified into three broad categories (continued)

Intangible assets include such things as company reputations, brand names, cultures, technological knowledge, patents and trademarks, and accumulated learning and experience. These assets often lay an important role in competitive advantage (or disadvantage), and firm value.

Resources can be classified into three broad categories (continued)

Organizational capabilities are not factor inputs like tangible and intangible assets; they are complex combinations of assets people, and processes that organizations use to transform inputs into outputs. The list of organizational capabilities includes a set of abilities describing efficiency and effectiveness: low cost structure, lean manufacturing, high quality production, fast product development.

Source: David Collis and Cynthia Montgomery

A Resource-Based Approach to Strategy Analysis: A Practical Framework

4. Select a strategy which best exploits the firms resources and capabilities relative to external opportunities

Strategy

3.

Appraise the rentrent-generating potential of resources and capabilities in terms of : a) Their potential for sustainable competitive advantage, and b) The appropriability of their returns Identify the firms capabilities: What can the firm do more effectively than its rivals? Identify the resources inputs to each capability, and the complexity of each capability Identify and classify the firms resources. Appraise strengths and weaknesses relative to competitors. Identify opportunities for better utilization of resources.

5.

Comparative Advantage

Identify resource gaps which need to be filled Invest in replenishing, augmenting and upgrading the firms resource base

2.

Capabilities

1.

Resources

Source: Robert M. Grant

The Resource-Based View: Elements of Competitive Advantage

Unique Competencies
Supported by resources and capabilities owned by the firm

Sustainability
Lack of substitution and imitation by competitors

Generating Value

Sustaining Value

Competitive Advantage
Retaining Value

Value not offset by costs

Appropriability
Retention of value created inside the firm

Opportunism/Timing
Offsetting the cost of acquiring resources and capabilities

Source: Adapted from Peteraf (1993) and Ghemawat (1991).

The Resource-Based View of the Firm Winning Formula

Develop resources and capabilities which are rare, valuable non-tradeable, that form the basis of the core competencies of the firm; make those resulting advantage sustainable by precluding imitation or substitution from competitors; appropriate the resulting economic rent by preventing negative hold-up and slack conditions; and make sure that the implementation process is done in such a way that its associated costs do not upset the resulting benefits. It is Strategy by Real Estate!

Comparison of Critical Elements in Porters and Resource-Based View Frameworks

Porter Focus of Strategic Attention Types of Competitive Advantage Industry/Business Low cost or Differentiation

Resource-Based View Corporation Resources, Capabilities Core Competencies Core Products, Strategic Architecture

Basic Unit of Competitive Advantage

Activities

Comparison Among Strategy Frameworks

Porter
Focus of Strategic Attention Industry/ Business

Resource-Based View
Corporation

Delta Model
Extended Enterprise
(The Firm, The Customers, The Suppliers and The Complementors)

Types of Competitive Advantage

Low cost or Differentiation

Resources, Capabilities, Core Competencies Core Products, Strategic Architecture

Best Product, Total Customer Solutions, System Lock-In

Basic Unit of Competitive Advantage

Activities

Operational Effectiveness, Customer Targeting, Innovation

Adaptive Processes:

Strategy As

Rivalry

Real Estate

Bonding

Porters Five Forces Model

The Delta Model- An Integrative Strategic Framework

The Triangle
SLI

TCS

BP

Mission of the Business Business Scope Core Competencies Competitive Positioning Activities that drive profitability Industry Structure External factors determining industry attractiveness

Business The Strategic Agenda

I CT
Adaptive Processes Strategic Agenda

OE

Aggregate and Granular Metrics

Experimentation and Feedback

New Entrants (Entry Barriers) 2 6 5

Industry Competitors
Suppliers

Intensity of Rivalry

Buyers 4

1 1. 2. 3. 4. 5. Substitutes Create a powerful 10x force to change the rules of the game. Reject Reject initiation of competitors, a productproduct-centric mentality, and a commoditization mindset. Generate significant barriers around the customers through a unique unique customer value proposition based on deep customer segmentation, and consumer understanding. Do not use competitors as a central benchmark to guide your strategic strategic actions. The key industries to concentrate on are those of your customers, suppliers, and complementors. Strategy is not war with your competitors; it is love with your customers, suppliers, consumers, and complementors. Develop and nurture the integrated value chain with your key suppliers suppliers and customer. Bring in all the power of B2B and B2C to accomplish this objective. This is critical for customer locklock-in. Add a new player: the complementors. Seek complementor support and investment in your business. Make them key partners in seeking the delivery of Total Customer Solutions. Extend Extend the unique value proposition to include complementors, as well as suppliers. This is the key for obtaining obtaining complementor locklock-in, competitor locklock-out, and ultimately System LockLock-In. If your customer, suppliers, and complementors are numerous and fragmented you could also provide them with statestate-ofofthethe-art management practices and a wealth of information and intelligence intelligence that they could never acquire otherwise. Your locklock-in will be admirably enhanced.

6.

The Required Resources and Capabilities for the Delta Model

1. First and foremost, you need a deep customer and consumer understanding obtained via a detailed segmentation and supported by aggregated and granular metrics. 2. This understanding should also be extended to critical suppliers and complementors. Do not get trapped in your industry trends alone. 3. The implementation of the new business model is realizable mostly because the opportunities and potentials offered by the Internet and its associated technologies: e-business, ecommerce, e-systems. The appropriation of this skill is essential.

The Required Resources and Capabilities for the Delta Model (continued)
4. Create the dynamic and entrepreneurial environment of risk-taking and reward-sharing originated by the professional challenges associated with the new technologies. 5. The ultimate output is the development and implementation of unique and exciting value propositions for all the key players: customers, consumers, suppliers, and complementors. The first mover advantage is overwhelming. You have to be fast.