Business Strategy
Cambridge University Entrepreneurs
2 November 2000
A great idea for a new business needs to be supported with a sound strategy
Strategic analysis
Understanding the impact of the economic and competitive environment on the future of your proposition
Implementing the strategy
Identifying how you will make it happen and exactly what you’ll do
Strategic choice
Identifying and choosing between the possible strategic options open to you
A great idea
Strategic analysis is about understanding how changes in the wider environment affect your business proposition
What is going on in the market
PEST analysis – a checklist for assessing the drivers within the business environment in which you will operate
Porter’s five forces model – a model to characterise the competition your business will encounter
How well placed are you to exploit the opportunities and counter the threats
SWOT analysis – a framework for matching organisational strengths and weaknesses to opportunities and threats
PEST is a simple checklist for analysing the drivers within your business environment
This is a quick checklist to prompt thinking about the environmental factors relevant to your business – there may well be others
Don’t try to be comprehensive – concentrate on the top few factors that will have the greatest impact on your business
Look for the long-term drivers of change (for example, globalisation, technical shifts, potential shortages of key resources … )
Identify any factors that may pose an opportunity for you but not your competitors – this could be an essential source of competitive advantage
Remember that the outcome of doing a PEST analysis is a sound understanding of the opportunities and threats your business will face
Regulation
Tax regime
Environmental ‘green’ issues
Employment laws
Government stability and legislative agenda
Political/legal
Business cycles
Economic trends – inflation, money supply …
Unemployment/labour supply
Disposable incomes
Energy availability and cost
Economic
Population/demographics
Income distributions
Lifestyle expectations/ consumerism
Education levels
Social mobility
Social
Government spending on research
Innovations
Focus of technology effort
Speed of technology transfer
Technological
Porter’s model looks at how the immediate competitive
environment shapes business strategy
Competitive markets are shaped by the threat of new entrants or substitute products/services, and the relative power of suppliers and customers
There is likely to be intense rivalry between different players attempting to compete in the same marketplace
Michael Porter’s ‘Five Forces’ model (1980)
Industry
rivalry
Potential new entrants
Buyers
Substitutes
Suppliers
‘Buyers and suppliers’ can place constraints
on your business and limit margins
Suppliers have market power when:
your choice of alternative suppliers is limited
‘switching costs’ – the economics of changing supplier – are high
their product/service has a high-profile brand (for example, ‘Intel Inside’)
your business is not that important to them – demand for their product is high and they could easily sell elsewhere
Strong suppliers might pose a threat of forward integration if you are unwilling to meet their price demands
Individual customers can exert influence over your business when:
they buy a large proportion of your output (can demand bulk discounts, special invoicing terms … )
they have several other potential sources of supply to choose from (for example, commodity products) and seek to ‘squeeze’ their suppliers
your product/service forms a large part of their cost-base – they will shop around for the best deal
Customers might pose a threat of ‘backward integration’ if your prices are too high
Your share of the market can be eroded by competition
The ability of new players to enter the market depends on the existence of ‘barriers to entry’ put up by incumbents
economies of scale
capital requirements needed
access to distribution channels (for example, pubs, cinema … )
experience of operating in the market
likely retaliatory behaviour
government legislation or regulation
Differentiation/innovation (builds brand and image)
Alternative products and services can render your offerings unattractive or even obsolete
Direct substitution
mobile phones displace pagers
CDs replaced records….and in turn may themselves be supplanted
Indirect substitution (competition for consumer spend)
new car or a holiday?
‘doing without’ (for example, giving up drinking, smoking … )
One tactic to resist substitution is to build in ‘switching costs’, which make it uneconomic to change to the new product; another is to build customer loyalty to your product by offering incentives to keep buying
A SWOT analysis matches environmental opportunities
and threats with organisational strengths and weaknesses
Analyse the environmental opportunities and threats first (for example, using PEST)
Also consider the customer need which you will fulfil
Define organisational strengths and weaknesses in terms of exploiting these opportunities and defending against the threats
Measure strengths and weaknesses relative to those of your competitors – there are not absolute measures
Try to get objective independent assessments of strengths and weaknesses – those of managers or founders in the firm are inevitably distorted and subjective
Focus on the top few issues – don’t let too much detail cloud the message
Avoid looking too much at the past – focus on the competitive position now and in the future
Areas to think about in looking at organisational strengths and weaknesses include:
marketing
alliances
access to financial resources
production
technology
distribution
workforce
organisational structure
clarity of strategy !
Strategic choice is about deciding your high level approach to ensure success and in which parts of the market you will play
What is your key competitive advantage
Generic strategies for market entry
Off all the activities involved in delivering a service or product to a customer – which will you be involved in
Value chain models
If you are selling more that one product or service – are you developing a balanced portfolio
Portfolio analysis
One critical choice is the way in which your business
will create competitive advantage over your rivals
Three fundamental ‘generic’ strategies:
Cost leadership – business sets out to be the lowest cost producer in the industry – maybe through technology). Emphasis is on achieving economies of scale/absolute cost advantage over competitors (for example, voice telephony services, steel manufacture … )
Differentiation – requires some unique element of service/product for which the customer is willing to pay a premium price (for example, high performance cars, designer clothes … )
Focus – business concentrates on serving the precise needs of a very narrow, well-defined market segment (for example, Coca-Cola) – classic strategy of new start-ups
Cost leadership
Differentiation
Low cost
Differentiation
Segments
Industry-wide
Competitive scope
Source of competitive advantage
Focus
It is vital to understand the value chain for your industry and where you plan to fit in
End
user
Terminal
Mobile ecommerce expands the value chain
Access
provision
Content
packaging
Goods and services
Access
provision
Terminal
Terminal
End
user
End
user
Person-to-person mobile services
Payment
processing
Security
services
It is also worth considering the role different players may be taking within the value chain
Increasing involvement
Core business
Potential involvement
No involvement
Mobile operators
Other merchants
Financial institutions
Internet portals
Mobile portal startups
Content providers
Eqpt manufacturers
Virtual ISPs
Content
packaging
Access
provision
Goods and
services
Security
services
Payment
processing
Portfolio analysis helps assess the balance of activities
(business units or product streams) across the company
The Boston Consulting Group (BCG) matrix
Business growth rate (%)
Stars
Dogs
Market share (relative to competitors)
Low
High
Low
High
Problem children
Cash cows
The BCG matrix is a visual display showing the expected
balance between cash users and cash generators
Stars have high market shares in a growing market. Company may be spending heavily to win this share but is hopefully gaining valuable experience (reducing costs) faster than competitors
Cash cows have high market shares in a mature (slow growth) stable market. High market share should mean unit costs lower than those of competitors
Dogs have low share in static or even declining markets. They may be a drain on resources as the company struggles to keep them going
Problem children are products or businesses in a growing market but with low market share. They represent risky investments – heavy cash investments to grow market share may not be matched with operational costs reductions
BCG matrix has the advantages of simplicity and clarity, but there are caveats:
markets (and hence market share) may be difficult to define
it’s a static analysis – it’s worth thinking where individual products/business may migrate over time
designation as a cash cow can stifle innovation and revitalisation
Case study – Manchester United PLC
Current revenue streams
Gate receipts
Merchandising
Television rights
Sponsorship
Catering/events
Manchester United PLC – revenue breakdown
12%
-9%
33%
16%
8%
CAGR 97-00
Source: Manchester United PLC Annual Report 1997 and 2000
Case study – Manchester United PLC
Breakout group activities
Prepare a succinct statement of what you think Manchester United’s ‘product’ is
For each current area of the business consider external opportunities and threats
Conduct a portfolio analysis of the different areas of the business (guess relative market share)
Devise a simple strategy to grow each area of the business
Consider radical strategies the company could adopt to significantly enhance revenue growth in the coming years
