Strategic Planning

What is strategic planning?

Attempt to develop effective plans that create
disciplined and informed investment behavior
throughout the organization (generally by line
management, not staff management)
BIZ3147

Strategic planning elements

Competitive Advantage

Mission statement / Industry analysis / Financial goals

/ Strategic initiatives / Programs

Prof. Bo Kyung Kim

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Course Map

Plan for Today

Competitive Advantage

Introduction

Firm

Resources &
Capabilities

Boundaries
of Firms

Scope of
the Firm

Vertical
Integration

Global Strategy

New Business

and

Industry

Industry
Evolution

Integrate

Competitive Advantage

Partnering

Value-Cost [VC] framework

Stuck in the middle
Cost / value drivers
Sustainability

Strategy Execution
Resources/Capabilities and Value Creating Activities
Relationship between R&Cs, Activities, and
Value/cost Drivers

Multiple
Businesses

What is Competitive Advantage?

Market Position

Superior Profits
Goal of strategic thinking
The focus of entrepreneurial action
The motivation for top managements vision for the
firms future
A focus on economic fundamentals and performance

Economic
Value
Created

Total
Perceived
Customer
Benefits

Total Cost
Firm A

Competitive Positioning
Value
(Willingness
To Pay)

Economic
Contribution
(Economic
Value
Created)

Buyers Surplus

Price
Firm Profits
Cost

Primary focus:
Primary emphasis: what drives

Firm B
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Generic (Business-Level) Strategy

Cost Leadership

Value drivers

A firm tries to gain competitive advantage by decreasing

the cost of its products relative to the cost of other firms
products
A firm mainly focuses on developing cost drivers

Allows a firm to
increase wtp

Improve
market position

Differentiation
A firm tries to gain competitive advantage by increasing
the (perceived) value of its products relative to the value of
other firms products
By increasing the value of its products, the firm can charge
a higher price than it would otherwise
A firm mainly focuses on developing value drivers

Allows a firm to
decrease costs

Cost drivers

vs. product (marketing)

vs. valuation (finance)

In the same industry, firms can follow different business strategies

Stuck in the Middle Examples

Stuck in the Middle!

Airlines

Willingness
To Pay

Samsungs Smartphones

Price

Cost
Example: Figure 3.3
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Stuck in the Middle?

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Stuck in the Middle? (II)

Two assumptions behind Stuck in the Middle

Willingness
To Pay

A SIM firm cannot compete on value with the

Differentiator or on cost with the Cost Leader
A SIM firms customer base is too small to allow it to
improve its competitive position

Counter example: Target Corporation

Price

Gross margin over revenues is close to that of higher

value firms - JCPenney
Operating costs per revenue dollar is closer to low
cost firm Wal-Mart

Cost
Example: Figure 3.4
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Examples of Cost Drivers

Examples of Cost Drivers (cont.)

Scale or volume economies

Low input costs

Firms with lower cost inputs are better positioned to take

advantage of industry opportunities and absorb changes
Partial explanation of the development of Silicon Valley

per unit declines as volume increases

based on high recurring fixed costs or sunk costs

Scope economies

Vertical integration

Cost of producing two products together is lower than

the cost of producing them separately

For tasks that are specialized to the firm, coordination

costs are lower within the firm than with a market supplier

Learning curve

Organizational practices

per unit declines with cumulative

volume as learning takes place and practices improve

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Firms develop process innovations to lower costs or

improve value in specific activities

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Disadvantages of Cost Leadership

Willingness to Pay

The highest price

would be willing to
pay for a product in absence of a competing
product and in context of other purchasing
opportunities

It generally needs a high capital investment

It can be more easily imitated
It can become a self-destructive obsession
It can undermine value

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How to estimate?
Differs depending on different levels (individual,
group, or nation), different contexts, and different
times

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Bases of Differentiation Value Drivers

Relationship within
/ between firms
- Linkages with other
firms
- Service & Support
- Distribution channels
- Complements

Attributes of
Products & Services
- Technology (design,
features or functionality)
- Quality
- Geography
- Risk assumption

Disadvantages of Differentiation
Customers, not producers, always determine the
products value
Value is multi-dimensional quality is not the only
dimension of value
It is generally difficult to measure exact value
It can undermine the costs of producing a high-value
product

Relationship with
the customer (B-C)
- Brand/Reputation
- Customization
- Breath of line
- Environmental policies
- Service/Delivery
- Network externalities

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Isolating Mechanisms

Increasing Customer Retention

Mechanisms that prevent industry forces from

eating up the firms profits

Increase switching costs

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Search costs

Increase customer retention

Reduce imitation by competitors

High for products whose value is apparent only after

experiencing the product experience goods

Transition costs
Costs associated with shifting from old equipment or
practices to new

Learning costs
Costs incurred in learning a new process

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Barriers to Imitation

An Interesting Dilemma related to Sunk Costs

Property rights

Industries that need a large up-front investment

(sunk costs)

Patents, trademarks

Dedicated assets

For competitors:

Exclusive distribution channels, suppliers or location

A major impediment to the entry of firms in the industry (an

important barrier to imitation)

Sunk Costs
One time, non-repeated investments in technology,
brand, network scope and other assets whose
economic benefits are reaped continuously afterward

For a focal firm:

A major impediment to ___________ (e.g. sunk costs fallacy)

Casual ambiguity
Difficulty in copying a capability because it cannot be
modeled effectively
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Plan for Today

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Building Competitive Advantage

Competitive Advantage

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Market Position

Value-Cost [VC] framework

Cost / value drivers
Stuck in the middle
Sustainability

Value
Drivers

Isolating Mechanisms
Retaining
Customers

Cost
Drivers

Superior Market Position

Preventing
Imitation

Defendable Market Position

Strategy Execution
Resources/Capabilities and Value Creating Activities
Relationship between R&Cs, Activities, and
Value/cost Drivers

Sustainable Competitive Advantage

Figure 3.7
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Resources and Capabilities

Building Capabilities

Resources

Capabilities are produced by specific activities

and policies

The tangible and intangible assets controlled by a firm that can

be used to plan and execute its strategies (to improve its market
position)
What firms HAVE
e.g. patents, natural resources, brand, geographical location

Two frameworks for mapping activities and

policies are:
value creating activities framework
Activity system framework

Capabilities
A firms ability to accomplish tasks that are linked to performance
by increasing value, decreasing cost, or both
What firms CAN DO
e.g. teamwork, marketing skills, supplier management skills

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Activity Systems

Value Creating Activities

Interconnected components of
a firm that contribute to its
market position

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Policies
Programs
Value creating activities
Product characteristics
Key resources
Firms structure and culture

Act IV

Act I

Goal

Act III

Act II

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Strategy, R&Cs, and Activities

Strategy is a Verb (Activities)

Leverage
existing R&C

Resources
& Capabilities

Perspective 1: Consistency of
v
leads to
competitive advantage.

Strategy
Build new R&C

Resources and capabilities are produced

by specific activities and policies
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Resources & Capabilities are Nouns

Perspective 1: Consistency of value

creating activities leads to
competitive advantage.

Perspective 2:
Resources/capabilities behind the
activities lead to advantage
Can I run to Cox?
I am in good enough shape to do so
I live too far for it to be practical (lack
of location resource)

Goal:
a healthy
lifestyle

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Sources of Competitive Advantage

A firm is a bundle of resources and capabilities (Penrose,
1959, p. 24)
It also has a set of activities (Porter, 1996, p. 62)
Both units can be sources of competitive advantage

Goal:
a healthy
lifestyle

Resources
& Capabilities

Can I eat healthy?

Activities

Companies can compete on the same value and cost

drivers, but differ in how well they achieve them because
they have a different set of R&Cs or because they
engage in a different set of activities!

Do I have the money to buy organic

foods?
Do I have the willpower to resist
sweets?
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Penrose, E. (1959). The Theory of the growth of the firm. New York, NY: Oxford.
Porter, M. E. What is strategy? Harvard Business Review, 74, 61-78.

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How to Sustain Competitive Advantage

Summary Points

Competitive advantage is a combination of

creating an effective market position (based on
successful cost/value drivers) and defending it
against competitors (by increasing switching
costs or reducing imitations by competitors)
Companies can compete on the same value and
cost drivers, but differ in how well they achieve
them, because they have a different set of R&Cs
or because they engage in a different set of
activities!

among value-chain activities

The link across multiple components of the value
creating activities (mutually re-enforcing activities)
Focus on configuration and re-configuration of activity
set

Fit between your (generic) strategy and activities

(or underlying resources and capabilities)
Focus on leveraging (extant) and building (new)
resources/capabilities
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Administrative Issue

Next Class

Project group (___ students) due Tuesday (send

me the list of preferred members via email or
provide the hard-copy list of them)

Case: Wal-Mart Stores

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What are Wal-Marts cost/value drivers?

What is Wal-Marts market position and how does it
protect it?
Lay out Wal-Marts activities in the value creating
activity framework to get an overall map of the
company and evaluate whether or not these activities
benefited Wal-Mart to achieve a significant cost
advantage

I will assign those who havent submitted a full list of

team members to new/existing groups arbitrarily (up
to five members per group)
The final list will be posted on YSCEC
Please inform me by next class if you would like to
switch groups

Please bring the Wal-Mart case!

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