Strategic Management

Strategy Formulation Strategy Execution

(2 credits) (1 credit)

Lead Discussant
Dr. Jitesh Mohnot
PhD in Strategy - IIM Trichy, MBA, BE
Major Unit of Analysis of S.M.
• The locus of Strategic Management discipline is at the level of the
Firm, not departments within it…
• So, we look at
• TMTs
• BoDs
• CEOs/MD
• Firm level performance metrics_RoI, RoE etc.
Why do we need Strategy?

Competition

3
Day-to-day choices v/s Strategic choices
Choices in personal life
• Strategic • Day-to-day and tactical
• Which family you are born • Clothes you wear for a party
into…(choiceless) • Where do you host your birthday
• Business v/s Service (vocational) party
• Which field? • How much to spend on clothes
• Whom do you marry?
 Strategic Choices
• Tata group’s consumer company enters into Spices – Tata Sampurna
• Netmeds sold to Reliance Industries Limited at Rs 624 crores as RIL
eyes e-pharma.
• Shopper Stop (a K Raheja group company) sold its hypermarket arm
– Hypercity Retail to Future Retail
• Future retail being sold to RIL.
Jitesh Mohnot 7
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Integrated and coordinated set of commitments and
actions designed to exploit core competencies and gain a
competitive advantage
What is the Main puzzle/question we are
getting into in this course…
Yet, differences in profits/performance between firms
 What is the meaning of Rent

• English Meaning of Rent:

• a tenant's regular payment to a landlord for the use of property or land.
• E.g: I cannot even afford to pay the rent on this flat

• Economic meaning of rent - ???

 Economic meaning of Rent

Difference between Rent & Profit

Profit is viewed at the level of the firm/division

Rent is viewed at the level of Resource/Activity

 Rents and the idea of Strategy

• Strategy can be viewed as a 'continuing search for rent' (Bowman,

1974: 47)

• The generation of above-normal rates of return (i.e. rents) is the focus

of analysis for competitive advantage…
 Competitive Advantage (CA)
• Competitors are unable to duplicate or find too costly to imitate

• Marker of CA:

• Above Average Returns

• What is average here

• >>
• Returns in excess of what investor expects in comparison to other investments
with similar risk
Structure-Conduct-Performance Model
(Bain-Mason-Scherer)
Concentrated Industries
&
Fragmented Industries
*CSD- carbonated Soft Drinks Industry
Strategic Positioning Approach
to Strategy

Dr. Jitesh Mohnot

1980 Michael Porter
Distinguished Professor at Harvard B.S.
 EARLY IO STUDIES
STRUCTURE-CONDUCT-PERFORMANCE (SCP) MODEL

STRUCTURE CONDUCT PERFORMANCE

• No. of • Price taking • Firm

competing • Product performance
firms differentiation and stability
• Homogeneity • Tacit Collusion
of products • Exploiting
• Costs of entry market power
and exit Michael Porter : The Strategy View
EARLY IO STUDIES : The Public Policy View What are the factors that threaten an industry’s
Identify conditions that would lead industry profitability? What actions should firm take to
structure towards more perfect competition and neutralize these threats and sustain superior
increase societal welfare. economic performance for a longer period of time?
 FIVE FORCES THAT SHAPE COMPETITIVE STRATEGY
Threat of
new ” As different from one another as industries
entrants might appear on the surface, the underlying
drivers of profitability are the same. “
- Michael E. Porter

Rivalry
Bargaining
power of
amongst Bargaining
power of
suppliers existing buyers

competitors

Threat of
substitute
product or
Source: Michael Porter, Five forces that shape competitive
strategy, Harvard Business Review, 2008.
services
 The idea of EXTENDED RIVALRY
Porter’s Argument
• Competition extends beyond existing
Threat of
new rivals.
entrants
• Value created by an industry can be
Rivalry
appropriated by powerful buyers,
Bargaining
power of
amongst Bargaining
power of
suppliers, substitutes or the new
suppliers existing buyers

competitors
entrants.

Threat of
substitute
product or
services
Unit of Analysis of the framework is “Industry”, not an individual “firm”

Threat of INDUSTRY :
new
entrants Identifying and defining the
industry is an important first step in
industry analysis.
Rivalry
• Product scope; Geographic Scope.
Bargaining
power of
amongst Bargaining
power of
suppliers existing buyers

competitors
Industry generally refers to as set of
Threat of
firms supplying to similar markets.
substitute
product or
services
Let us understand each
of the forces.
 Porter’s five forces

Threat of
new
entrants Force 1:

Rivalry Rivalry amongst existing

Bargaining amongst Bargaining
power of
suppliers existing
power of
buyers
competitors
competitors
The most obvious of the
Threat of
substitute
product or
threats to industry
services
profitability.
 Rivalry amongst Existing Competitors
WHEN IS THE INTENSITY OF RIVALRY HIGH?

• Competitors are numerous and • Rivals are irrationally committed to

equal in size business
Example 1 : Personal Computer Example : Some state-owned enterprises
Industry;
2. ITC Tobacco (counter Example of
Monopoly)
• Exit barriers are high
Example : Some state-owned enterprises
• Industry growth is slow
Example 1 : Indian telecom industry today ;
2. Cola Wars
BASIS OF COMPETITION Rivalry amongst existing
Price competition is a zero-sum competition. competitors
Industry loses.
When does price competition dominate?

• Product capacity can be added only in large • Perishable Products

quantities – capacity augmentation is by E.g. Vegetables; Movie Tickets
leaps and bounds and not incremental
E.g. Steel Industry; Airframe mfg

• Cost structure of the industry –

• Less scope of differentiation
High fixed costs and low marginal E.g. PC assembly;
costs Smartphones
Fixed costs business model
Eg. Hotel industry; Operating system industry
Second Force

Threat of
new
entrants

Rivalry
Threat of New Entrants:
Bargaining
power of
amongst Bargaining
power of
Tomorrow's rivals
suppliers existing buyers

competitors

Threat of
substitute
product or
services
 HOW TO POTENTIAL ENTRANTS EFFECT INDUSTRY Threat of
PROFITABILITY? New Entrants

New entrants increase rivalry

• Fight for market share
• DECREASES REVENUES for Incumbents!
• Price war • LIMITS PROFITABILITY!
• May change value proposition

Even the THREAT OF ENTRY can keep PROFITABLITY DOWN

To preempt entry, incumbents
• Keep prices down • IMPOSES COSTS!
• Build loyalty through differentiation • LIMITS PROFITABILITY!
• May lobby to restrict entry – Govt Regulation
 Entry Barriers Threat of
New Entrants
ENTRY BARRIERS ARE HIGH WHEN THERE ARE
1. HUGE ECONOMIES OF SCALE.
Huge economies of scale are present when the average cost/unit goes down as
scale of production increases

Supply Side economies of scale

Example 1 : Pharma Industries (in R&D) ; 2: Organized Retail (in logistics and
IT systems)

Demand Side economies of scale (network effects)

Example 1: Online auction sites like Ebay; 2: Insurance products
 Threat of
ECONOMIES OF SCALE CONSTRAINTS ON POTENTIAL ENTRANTS New Entrants

• Huge capital requirements

• Possibility of overcapacity Strategic choices for potential entrants
• New technology that shifts optimum
scale – e.g. Smaller Steel plants in USA
• Take steps to increase demand
• Differentiate. To offset cost
disadvantage – Costco in USA &
Sainsbury in UK
• Acquire – Mittal Steel
 Entry barriers are high when there is:
Threat of
New Entrants
2. Product Differentiation
• Strong established brands
E.g. Cola soft drink industry (Coke Classic; Thumsup) ; Fashion Industry

3. Absolute Cost Advantages

• Preemptive access to factor inputs/geographic locations/distribution channels
E.g. Steel Industry (Access to coal mines) ; Retail industry - Store locations

4. Proprietary technology
E.g. Discovery drugs (pharma) industry (patent protections)

5. Know-how (mostly intangible, built over time)/ Cumulative learning experience

Example : Pharma industry (R&D capability) ; Consulting Industry ; Airframe Mfg
 Threat of
6. GOVERNMENT POLICY CAN INCREASE ENTRY BARRIERS New Entrants
• Direct restrictions
Example : Banking industry (licensing) ; Indian Tobacco industry (no FDI)
• Indirect influence – Impact of environmental, health, and intellectual property
regulations.
Example : Indian Tobacco industry (ban on advertisement)

7. HIGH SWITCHING COSTS POSES ENTRY BARRIERS

• One-time fixed costs borne by customers when they switch from one product to another
Example : Indian telecom industry and mobile number portability

8. High Multi-Homing Costs poses entry barriers

• MS Word
Threat of entry is LOW when EXPECTED RETALIATION IS STRONG
• Contrived deterrents by incumbents ; Artificial barrier of entry Threat of
New Entrants
• Incumbents engage in activities with sole purpose of deterring entry.

CONTRIVED DETERRENCE IS EFFECTIVE if,

• Incumbents possess substantial resources and have demonstrated a history of
vigorous response.
Example : BCCI’s response to Zee’s Indian Cricket league
• Incumbents make preemptive investments in capacity
Highly specific public announcements
Example 1 : Indian petroleum refining industry ; 2 : US electric turbine
industry
STRATEGIC CHOICE FOR NEW ENTRANT
Make entry through less visible segments
Example : Entry of Japanese firms into US auto industry & British motorcycle industry
Porter’s 5 forces

Threat of
new
entrants

Threat of substitutes
Rivalry The least obvious of the threats to industry profitability.
Bargaining
power of
amongst Bargaining
power of
suppliers existing buyers

competitors

Threat of
substitute
product or
services
 Threat of Substitutes
How do substitutes affect industry profitability?

• Perform similar or same functions by different means DECREASES REVENUES !

• May offer a better value proposition [e.g. Air travel vis-à-vis Railways]
• Reduces revenues
LIMITS
• Places a ceiling on prices PROFITABILITY!
• Calls for innovation to match value proposition
Substitutes can be powerful threat especially if they, Threat of substitutes

Emerge from other industries ; can be easily overlooked

Example 1 :Improvements in plastic technology is making plastics an effective substitutes

steel /aluminium etc ;
2.Mobile phones substitute the function of watches as a mere time display device

Can offer superior price performance equation

Example 1: Generics substitute for discovery drugs;

2 : refurbished electronics
Porter’s 5 forces

Threat of
new
entrants
Bargaining power of Buyers

Rivalry Extended rivals downstream

Bargaining
power of
amongst Bargaining
power of
suppliers existing buyers

competitors

Threat of
substitute
product or
services
 Bargaining power
Powerful buyers put a ceiling on prices of Buyers

Buyers are powerful if,

• Buyer industry is concentrated
Eg: Indian defence industry (Monopsony- Single buyer- Govt);
Consolidation of theatre chains in India

• The products are Undifferentiated

E.g. grains market, Vegetables market, 3. case of Tata salt (counter example)
 Bargaining power
Buyers are powerful, if of Buyers

• Buyer industry can pose credible threats of backward integration

E.g.1: Organised retail industry has power over its suppliers - Big Bazzar vs
Kellogg’s, Cadbury & PepsiCo
2. concentrate producers making cans
3.Samsung making Tizen OS
• Switching costs of buyer is low
Example 1 :Indian consumers have more power over telecom operators post
MNP
• Substitutes are available for supplies
Example 1 :improvements in plastic technology may increase buyer power of
automotive industry over steel/aluminium industry
 Bargaining power
of Buyers
Intermediate buyers

Intermediate buyers are powerful and includes choice of final consumer

Example: Google’s Android One
 Threat of
new
entrants

Bargaining power of suppliers

Rivalry
Bargaining
power of
amongst Bargaining
power of Extended rivals upstream
suppliers existing buyers

competitors

Threat of
substitute
product or
services
 Bargaining Power of Suppliers
Powerful suppliers put a floor on cost
Suppliers are powerful if,

• Supplier industry is concentrated

Example: PC industry is affected by the enormous clout of Microsoft

• Suppliers products are unique and differentiated

Example: Discovery drugs; Star players in IPL; Intel inside

• Supplier industry can pose credible threat of forward integration

Example: Movie production companies owning theatre chains; Google buying the Motorola
 Bargaining power
Powerful suppliers put a floor on costs of Suppliers

Suppliers are powerful if,

Switching cost for buyer industry is high

Example 1:Database terminals (Bloomberg for financial services industry)

Substitutes are not available

Example 1:United spirits Ltd’s move to substitute molasses with grains
(counter example)
How the five forces impact profitability?
• BUYER POWER • SUPPLIER POWER

• SUBSTITUTES

PRICE – COST = PROFIT

Direct Rivalry
THREAT TO ENTRY
Adapted from Margetta (2012) PP. 54
Industry structure,
though sticky, is not
static!
 Dynamics of Five forces
The five forces framework and help anticipate and exploit structural change

Shifting threats of new entry

Eg 1:expiration of patents, 2.changes in legislation, 3.change in license
regime

Changing supplier or buyer power

Eg 1 consolidation in buyer or supplier industry, 2.Emergence of substitutes for
suppliers or buyers

Shifting threats of substitution

Eg: Emerging trend in other industries

New basis of rivalry

Eg: Industry life-cycle
Five forces are dynamic.
However, separate out cyclical or
transient changes from true structural
changes
 Some Implications for Strategy
Shaping industry structure

E.g. Consolidation in steel industry (reduces rivalry, increases bargaining power and
improves profitability)

Positioning the firm

Strategy can be viewed as building defences against the competitive forces of

finding a position in the industry where the forces are the weakest
 Some Implications for Strategy

• Exploiting industry change

Industry changes bring opportunities to spot and claim new promising
strategic positions
Eg: Apple iTunes

• Redefine one’s scope

Firms present in industries with the weak prospects can redefine the
scope of their operations to counter the threats in existing industries
E.g: Bharat Forge’s journey to be an “industrial equipment's and
capital goods major”
What Porter missed?
 Power of Complementors
Complements increase the value of product/service by their presence

How is the value shared between producers of complimentary products?

• Monopolisation (Microsoft in PC industry)
• Differentiation (Delta corp casinos on cruises)
• Shortage vs competition (Hubbing of Airports by national carriers – Turkish
Airlines)
• Commoditization (Auto financing in automobile industry)
Can you think of any complementor driven strategies?
Ex:1 Microsoft vs Apple (operating system industry)
2. Unfolding battle in the smartphone operating system industry
Compliments themselves can be good strategic opportunities
Ex1: Auto financing in automobile industry
 Non-Market forces
What non-market forces could affect industry profitability?

•Government regulations
may affect entry barriers, exercise of market power,
environmental regulations
•Activist groups
•Political groups
•Other stakeholders
 INDUSTRY TO INTRA INDUSTRY
STRATEGIC GROUPS
A strategic group refers to a group of firms within an industry that are similar among
some of the strategic dimensions.

Breadth of product scope

Geography scope
Degree of vertical integration
Type of distribution system
Price/quality
Ownership/parent
 STRATEGIC GROUPS IN E COMMERCE INDUSTRY

ONLINE

DISTRIBUTION

CLICK &
MORTOR

TRADITIONAL
CHANNELS
NARROW WIDE
CATAGORY
 Strategy group analysis
- Some uses

Intermediate level of aggregation between

the analysis of the industry as a whole and
that of an individual firm.

Identify groups within industry whose

competitive position is weak.

Mobility Barriers
 Why do Firms Exist: A
Transaction Cost Perspective

Dr. Jitesh Mohnot

 Question 1

Why do firms exist?

 Question 2

How will the world look like, if there were no firms?

 Question 3

What is the opposite of a firm?

 In-class Activity

Let’s Plan for the marriage of your colleague…

 Special Requirements… let’s arrange for it…
• Banarasi Paan counter
• Various Chaat types – Pani Poori counter
• Celebrity show
 Problems faced during contracting for putting up stalls

• Logistics
• Quality issues
• Shortage
• Complimentary assets
• (Gas cylinder), tentage
• Wastage
• (commercial cylinder usage was 50 % only)
 What all kinds of problems crop up?
• Negotiation and problem of price discovery
• May end up paying high costs… (evaluation costs and bounded rationality)
• Unitization issues –
• There are so many dishes… will people eat the same quantity of each item vis-à-vis when they
were to eat it on piecemeal basis…
• Stock issues:
• Kam padh gaya toh… scarcity (Uncertainty)
• Bach gaya toh… excess (extra cost incurred)
• Chori ho gaya toh Ghee ke dabbe - Theft (opportunism)
• LPG cylinder issue

• Issues of coordination… too many parties involved…(coordination costs)

• Sheer diversity of transactions is overwhelming… (choreographer, tent-house, pizza
stall –Asset Specificity)
Another way to organize
To solve these problems…
• Lately, a distinct kind of firms have emerged engaged in Event
management and catering…
Marriages in India
 Marriages in India
Managed by family

Event Management
Hotels
Versus Choreography;
Celebrity
management etc.
Catering
Difference between Market and a firm…
Firms are a response to the high cost of using markets…
Ronald Coase
An Alternative view of the firm
• Firms are a response to the high cost of using markets…

• View firm as an entity running ‘nexus of contracts’

• With suppliers
• With clients
• With employees (a job is a contract)
• Psychological contract between employee and boss
Transaction Cost Perspective
 Another illustration
• Buying Fabric & then Tailoring
v/s
• Readymade garment firms
 Bounded Rationality in Transactions
Contracts can never be complete….contingencies may emerge later which cannot be
predicted in advance/ex-ante and therefore not included in the market contract
 Location of plants(asset):
Types of Asset Specificity Nobody will put long
transmission lines with
high load to far flung areas
where polluting plants are
generally located… so
captive power plants is the
only option (Hierarchy).
Counter e.g. OEMs cluster

In 1980s, computer
engg grads were
lesser in supply than
the demand by the
upcoming IT industry
(Infosys hiring civil
engineers & trg them

Suppliers of Tide
detergent to HUL

Rajnigandha brand of Pan masala;

Rajpal Yadav: Comedian imagery makes it difficult to pursue other genres
 Implications for Strategy
• Strategy formulation is a function of the environment in which firm is
embedded…
• However, environment changes continuously impacting transaction
costs…
• Once you start appreciating the notion of transaction costs and the
underlying factors such as uncertainty, frequency and asset specificity, you
will start scanning the environment as a manager differently…
• Pizza v/s Wanton for a caterer today
• Pizza v/s Pani Poori for a caterer 15 years ago
 Think of the following changes and its impact
on Transaction costs
• Exchange-rates
• Inflation
• Technological changes (SaaS, mobility-as-a-service etc.)
Entrepreneurial Opportunities and Asset Specificity
• When one starts offering a hitherto specific asset to various firms
into the market for a charge by aggregating demand…
• Example: Tractors for farmers -
• Mahindra is mulling an idea of creating a platform
• either as Uber of tractors
• Or blockchain - fractional ownership (merely peer-to-peer without an Uber like
intermediary)
• Trust
• Openness, shared
Characteristics of Blockchain
• Provenance (i.e. can trace the whole money/transaction trail)
• Inbuilt incentive system
Thank You
What’s Next… (after external Analysis)

Dr. Jitesh Mohnot

Why do some firms perform better than the others?
Internal Analysis of the firm: Towards Strategy Formulation
An Important term…

Competitive Advantage

What does it Mean???

McKinsey Generic value chain framework

Source: https://www.mckinsey.com/capabilities/strategy-and-corporate-finance/our-insights/enduring-ideas-the-
business-system#
Cadbury (Oreo) versus Parle