BU481 CLASS Notes

BU481 CLASS 2 Readings: “What is Strategy?”, Michael E. Porter - Root of the problem: failure to distinguish between operational effectiveness and strategy - A company can outperform rivals only if it can establish a difference that it can preserve. (deliver greater value to customers; create comparable value at a lower cost; or both.) - Operational effectiveness (OE) : performing similar activities better than rivals perform them ( efficiency ). i.e., reducing defects or developing better products faster - The essence of strategy is choosing to perform activities differently than rivals do - Origins of Strategic Positions: o Variety-based positioning o Needs-based positioning o Access-based positioning - Strategic positions can be based on customers’ needs, customers’ accessibility, or the variety of a company’s products or services. - Trade-offs are essential to strategy. They create the need for choice and purposefully limit what a company offers. - Without it, there would be no need for choice, thus none for strategy. Ideas would be imitated, and performance would be dependent on OE - - Fit drive both competitive advantage and sustainability - Fit locks out imitators by creating a chain that is as strong as its strongest link - Types of Fit o Simple consistency (between each activity and overall strategy. i.e., Vanguard aligns all activities with low-cost strategy) o Activities are re-enforcing (Neutrogena markets to upscale hotels to offer their guests dermatologist recommended soap) o Optimization of effort (The Gap considers product availability a critical element of strategy, thus restocks inventory daily) - Strategic positions should have a horizon of a decade or more, not of a single planning cycle Strategy is creating fit among a company’s activities. Many activities are interdependent, so the success of strategy means doing many things well, not just a few. If there is no fit, there is no distinctive strategy and little sustainability. - At general management’s core is strategy: defining a company’s position, making trade-offs, and forging fit among activities. Class Notes: Strategic management is a dynamic process of formulation and implementation of a series of well-aligned (fit) best possible actions to achieve a sustainable competitive advantage.

Purpose Stakeholder Performance MAX shareholder value - Industry leader + Increase Profit - Scale (Grow) - Better service to customers - Increasing Stakeholder Value inherently increases shareholder value in the long-term (i.e., ESG, CSR, etc.) - Contrarily, can have the opposite effect (i.e., Dirty industries like oil companies, understand their impact on the environment but caring for it would negatively affect shareholder value) - Fin. Ratios relative to industry standards - Intra vs Inter - Growth of the company - Customer/Employee satisfaction (Loyalty, Turnover) - Image (Goodwill, Brand awareness) Instrumental Stakeholder Theory : Not out of morality, but knowingly seeing the connection between maximizing shareholder value Normative Stakeholder Theory : Decisions for stakeholder value come from internal morality and ethical correctness. BU481 CLASS 3 – January 15 th Readings: “How Competitive Forces Shape Strategy?”, Michael E. Porter Contending Forces Threat of entry, sources of barriers to entry: 1. Economies of Scale 2. Product Differentiation 3. Capital requirements (i.e., Airlines Industry, Pharma) 4. Cost disadvantages independent of size 5. Access to distribution channels 6. Government policy Changing conditions 1. Threat of entry changes as conditions change. 2. Strategic decisions involving a large segment of an industry can have an impact on the conditions determining the threat of entry Powerful suppliers & buyers

Positioning – strategy is building defenses against competitive forces or as finding positionings in the industry where the forces are weakest. i.e., if it’s a low-cost producer, confront powerful buyers and sell them product not vulnerable to competition from substitutes  Dr. Pepper maximized product differentiation by maintaining a narrow line of beverages built around an unusual flavour Influencing balance—rather than cope with the external forces, alter their causes as well.  Innovations in marketing can raise brand identification/differentiation  Capital investments for large scale facilities or vertical integration affects entry barriers Exploiting industry change  When growth rate changes, business becomes more mature, and companies tend to integrate vertically  raises barriers to entry and drives out smaller competitors  Forecasting probability involves examining each competitive force, forecast the magnitude of each underlying cause, and then construct a composite picture of the likely industry profit potential  The potential of this industry will depend largely on the shape of future barriers to entry, the improvement of the industry’s position relative to substitutes, the ultimate intensity of competition, and the power captured by buyers and suppliers. These characteristics will in turn be influenced by such factors as the establishment of brand identities, significant economies of scale or experience curves in equipment manufacture wrought by technological change, the ultimate capital costs to compete, and the extent of overhead in production facilities. Multifaceted rivalry The key to growth – to stake out a position that is less vulnerable to attack from h2h opponents and less vulnerable to erosion from the direction of buyers, suppliers and substitutes.  solidifying relationships with favourable customers,  differentiation the product through substance or marketing,  integrating forward or backward,  establishing technological leadership.

Class Notes PESTEL MODEL ( General Environment ) Political – pressure from government bodies, NGOs, and social movements can exert to influence decisions and behaviours.  Non-market strategy – seek better outcomes by lobbying, public relations, contributions and litigation. Economic – Growth rates, Employment level, Interest rates, Price stability (inflation), Currency exchange rates. - Growth rate : measures the change in the value of goods and services produced by a nation’s economy. - Real Growth rate, adjusts for inflation, indicates economy’s position in the business cycle - During economic expansion: consumer/business demand rises, competition declines, more likely profitable and vice versa. - Employment Level: boom times: unemployment low, price of skilled human labour rises  firms incentivized to use more AI and cutting-edge equipment. - Downturns: unemployment rises, excess skilled human labour  wages fall - Interest Rates: real interest rates— the amount that creditors earn for lending their money and the amount that debtors pay to use that money, adjusted for inflation. - Low interest rates: easily borrow money to finance growth, reduce cost of capital and enhances competition, consumer demand rises (cheap credit). - Price Stability : little or no change in the prices of goods and services—is rare because economic growth is dynamic and needs to be matched with adequate monetary supply. - Inflation is a general and sustained increase in the overall price level for goods and services in an economy. - i.e., annual inflation rate = 9%, wages increase by 4%  real compensation decreases by 5% - Deflation is a sustained decrease in the overall price level. - Currency Exchange Rate: determines how many dollars one must pay for a unit of foreign currency. - Dollar appreciates (increases in real value)  More expensive for foreign buyers, reduces demand for U.S. exports, PPP increases for the U.S Sociocultural – capture society’s cultures, norms, and values.  Demographic Trends: capture population characteristics related to age, gender, family size, ethnicity, sexual orientation, religion, and socioeconomic class. Technological – application of knowledge to create new processes and products.

- The French sustained dominance in a growing global wine industry capitalizing on their perceived conception of the fundamentals of the wine industry being based upon character, quality, and prestige. - Through centuries of quality and traditional winemaking methods, France have established a competitive advantage. - Post French revolution, as vineyards became more fragmented, an emphasis on quality rather than mass-scale production was cultivated (primary competition was locally). - As a result of the mass production of glass bottles, transportation innovation, and the use of cork stoppers, the wine industry became global, and the French could export their wine internationally. - AOC laws-categorized - Regulation on Distribution - Expertise  reputation - Long heritage - Barriers to Entry - High domestic demand - Specialized soil + weather - Perceptions of premium products  aristocracy - Fragmented vineyards  quality over price - Labour intensive - Technology (pasteurizing, cork bottles, logistical, mass production) 2. What sources of competitive advantage were they able to develop to support their exports? Where were they vulnerable? - Developed Government support for their exports emphasizing the importance of higher quality through AOC regulations and maintaining a sense of strong reputation and image. Also, they created strict regulation on production of wine, barriers to entry, and domestic competition between existing French vintners. - Prestige of French wines, with the ratings of global committees, permitted producers to have higher prices than new competitors. - Vulnerability remained in their old-world techniques, limited space and tight regulations, inability to respond to the pace of changing consumer preferences, lack of marketing techniques, and lag behind innovation/experimentation with new technology comparative to the New World countries. 3. What changes in the global industry structure and competitive dynamics allowed challengers from Australia and other New World countries to take market share from France and other traditional producers in the late twentieth century?

- New World competitors capitalized on building marketing expertise in domestic markets. By responding effectively to changing consumer preferences, they dominated the middle segments of the wine industry. i.e., emphasis placed on mass appeal, strong distribution and brands, good price/quality ratio, strong promotional support. - Unrestrained by tradition and AOC regulation, new technologies and innovations allowed for better efficiency and taste for most consumers. i.e., controlled drip irrigation, innovative trellis systems, fertilizers, etc. - Innovations in packaging and market. “Wine-in-a-box” allowed for cheaper shipping costs and less storage space required. Screw caps also created cost-savings through input prices and reduced spoilage. - Control and vertical integration of the supply chain, they could retain bargaining power with retailers, extracting margins at each stage, reducing handling, less inventory, and overall advanced quality control. - Bigger vineyards - Flexibility  Innovation (i.e., Wine-in-a-box, Reverse osmosis, screw caps, steel + oak chips) - Decrease shipping costs - Consistent weather (growth longetivity) - Controlled value chain—consistency - New grape types - Diff customer segments - Understand customer preferences - Grape types vs. AOC classification - Increased marketing focus Class Notes: Old Wine (Fragmented) Value Chain: Grape Growers  Wine Makers  Distributors  Retailers  Customers Industry Key Points: - Growth - Net worth - # of Firms - Market Share Porter’s 5 Forces: Old Wine Buyers: High Suppliers: Low Threat of New Entrants: Low - AOC Classification

- Intellectual property protection - Path dependency —series of decisions/actions that have occurred over a period of time - Causal ambiguity —as a result of tacit knowledge in processes/people, and interconnectedness, makes it difficult to account for implicit actions Organized to capture the value  Structure  Culture Firm Value Chain - For an industry, helps determine how fragmented or integrated an industry is. This affects profit potential, as the amount of players affects how much control you hold (Case: Global Wine Wars) - For a firm, looking at all the different activities that one company does. This is important as it allows the firm to justify whether to do an activity itself or outsource (buy) from another company at a cheaper price. NEXT CLASS: What are the key aspects of the value chain that give an advantage over others? Which are key primary activities? Which are support activities? BU481 CLASS 6 – January 24 nd Harlequin Enterprises Ltd.: The Mira Decision 1. Who is Harlequin's series customer and what value does Harlequin's product create? - The primary customer of Harlequin's series romance novels is the typical series romance reader, who is attracted to the consistent content and identifiable nature of Harlequin novels. - The value created by Harlequin's product lies in providing readers with well-crafted, uniform romance novels that are available through non-traditional sales channels such as supermarkets, drugstores, and mass merchandisers, making them easily accessible to a wide audience. 2. Where in its series value chain does Harlequin create unique value? - robust network of authors and strong brand loyalty. - company's strengths lie in its creative control, consistent production efficiencies, and distribution, which have made it the world's leading publisher of women's series romance - Harlequin's products are differentiated and distinctive, with eight different series

3. Series romance fiction is one of the most profitable areas of book publishing. Why is it so difficult for competitors to imitate or replicate Harlequin's success? - built a strong network of authors and enjoys high brand loyalty, which are significant barriers for competitors to overcome. - structured, low-cost, and highly specified value chain, along with its creative control, consistent production efficiencies, and distribution - The company's established place in the market and its strong relationships with authors make it challenging for competitors to imitate its success 4. How do the series business and the single-title business differ? - In the series business, Harlequin has established itself as the world's leading publisher of women's series romance, with a strong network of authors and brand loyalty. Its series books are developed within specific parameters to cater to its loyal customer base, and the company's product is differentiated and valued for its high quality and great value - the single-title business would require Harlequin to reorganize its business model, invest in product development, marketing, and distribution, and recruit new authors. This is because the single-title market operates differently, with a focus on individualized contracts with authors and a need for differentiated and distinctive products 5. Can Harlequin be as successful/profitable in the single-title business as they are in the series business? Why or why not? - While Harlequin has the resources and talent to potentially succeed in the single-title business, the shift would necessitate significant changes and investments, making the potential for success less certain than in its established series business. 6. What resources/capabilities does Harlequin bring to the single-title business? - Harlequin brings several resources and capabilities to the single-title business, including its established place in the women's romance fiction market, a strong network of talented authors, and brand loyalty. - Harlequin's previous focus on consistency among product lines would need to be adjusted to accommodate the individualized contracts with authors in the single-title market 7. What would you recommend? (If you decide to enter the single- title business please describe how). How sustainable is this model going forward? Recommend: Entering the single-title business - Harlequin would need to leverage its established brand, its network of authors, and its expertise in the publishing industry - However, the company should be prepared to reorganize its supply and distribution systems, invest in capital, and adjust its product development and marketing strategies to suit the requirements of the single-title market

b. Non-traditional channels (supermarkets, book club) c. Standing order (predict demand) Product: Series Predictable Price: CAD 4.40 Promotion: Every time a new book comes out, its not treated as a new product. Customers want a Harlequin novel leading to lower advertising costs. Place: For: 41-yo educated women working outside home Exploration vs Exploitation. i.e., Google reinvesting into Google Maps to continue making it effective BU481 CLASS 8 – January 31 nd Case Study: Zappos Managerial discretion —the amount of power a manager has, what they can or can’t do. Sometimes there is only one option which makes the decision simple. Leaders matter more when they have more freedom to choose. Upper echelon’s theory —an organization top-level managers play a key role in explaining strategic decisions and organizational performance. Vision, Mission, Values  actions and objectives Elements of organization structure : interdependent upon each other. Hierarchy (neutral), Centralization (up/down), Formalization (down), Specialization (up) Why the downtown project failed? - If we believe top manager have significant influence over organization, then there must be a measure where they can be called out on intrinsically based decisions rather than what’s best for the organization or shareholders ( corporate governance ) Why, how, and how much (structure, culture, vision, mission, values based on managerial discretion)

BU481 CLASS 9 – Business Level Strategies, February 5 th , CH6 Value Creation: Cost vs. Perceived Utility  Who are our Customers? (STP Marketing)  What are their needs?  How can we satisfy these needs?  What are rivals are doing? Cost Perceived Value - Product o Standardized o Based on Price o Mass Volume (Economies of Scale) - Low Input factors cost - Outsourcing - Learning Effect - Volume (E. of. S.) - Technology (Experience Curve) - Product o Non-Standardized o Reputation o Not Based on Price o Less Volume (customization) - Customer Service - Product Features - Customization - Innovate - Complements Stuck in the Middle— position not clearly defined as either low cost or differentiation; Blue Ocean Strategy— Business-level strategy that successfully combines differentiation and cost-leadership activities using value innovation to reconcile the inherent trade-offs. - Eventually a blue ocean becomes a red ocean - blue oceans Untapped market space that is ripe for the creation of additional demand and the resulting opportunities for highly profitable growth. - red oceans The known market space of existing industries, where the rivalry among existing firms is cutthroat because the market space is crowded and competition is a zero-sum game.

Incremental vs Radical Innovations: Incremental Innovation Radical Innovation  Characteristics :  Serves to meet expressed/manifested needs.  Builds upon an established knowledge base.  Steadily improves an existing product or service offering.  Targets existing markets using existing technology  Pros :  Lower risk compared to radical innovation.  Allows for continuous improvement.  Cost-effective and more readily accepted by customers.  Benefits from ongoing optimization while positioning for long-term success  Characteristics :  Serves to meet unspoken/latent demands.  Draws on novel methods or materials.  Derives from an entirely different knowledge base or a recombination of existing knowledge bases with a new stream of knowledge.  Targets new markets by using new technologies  Pros :  Disrupts industries and creates new markets.  Provides transformative impact and breakthroughs.  Future-proofs organizations and attracts top talent and investment - Usually starts with a radical innovation, and continuously make incremental improvements to sustain competitive advantage. i.e., Gillette Co. Razor Blades Architectural vs Disruptive Architectural Innovation: Disruptive Innovation: Characteristics :  Involves reconfiguring existing product technologies to create improvements.  Can be both sustaining (improving existing products) and disruptive (creating new markets).  Requires a deep understanding of underlying systems and processes.  May lead to the development of products or services that provide superior customer experiences.  Can disrupt entire industries, transforming the way they operate. Pros : Characteristics :  Involves the transformation of costly or sophisticated products or services that gradually move up the market, eventually displacing established competitors.  Creates a new value network by entering an existing market or creating a completely new market.  Lower in performance initially but has different aspects that are valued by customers. Pros :  Targets new markets or creates entirely new customer segments.  Introduces significant, transformative change, often disrupting established

 Offers something new and valuable to customers that competitors find challenging to replicate quickly.  Can create entirely new markets or open up previously untapped segments.  Leads to streamlined processes and improved efficiency within an organization.  Allows companies to adapt to changing customer preferences, technologies, or regulations.  Positions businesses for long-term sustainability. industries.  May initially attract a different set of customers than those served by existing solutions.  Often faces significant resistance at first but, when executed successfully, can lead to the beginning of a new era affecting many sectors and geographies. Pipeline business model —where one buy from the other.. (sequential linear chain of activities) where at every stage aspect of value is added ( think: industry/company value chain ). Platform Business Model: Pros: - Platforms scale more efficiently than pipelines by eliminating gatekeepers - Platforms unlock new sources of value creation and supply. - Platforms benefit from community feedback Porter’s 5 Forces: Platform - Creates barriers to entry