What is strategy?
The determination of long-term goals and objectives of an enterprise and the adoption of courses of
action and the allocation of resources necessary for carrying out these goals
The components of a successful strategy:
1) Clear and consistent long-term goals: This does not involve the operational decisions as they are
not the ultimate drivers of long-term success => What industry? What product? How r we going
to compete with other companies in same industry?
2) Good understanding of the competitive environment: Understand the fundamentals of the
industry as well as their evolution. Get insight in the key elements of industry success so
understand what negative/ positive aspects are embedded within it in order to eliminate or
exploit them. Who are the other companies? Our competitors?
3) Building the resources and capabilities and use them in order to achieve the goals, to develop
competitive advantage: in order to create value or bring down costs, a corporation will need the
necessary amount of resources (which other companies don’t have e.g. brand name,
manufacturing facilities. You must create competitive advantage otherwise you will go bankrupt.
4) Effective implementation: Bridge the gap between strategy and execution by organizing your
organization in such a manner that allows for that supportive infrastructure. You must have a
certain culture, structure,
5) Strategic fit between goals, environment, resources and capabilities, and implementation: Line
up your goals with the competitive environment: Being cost efficient does not have any effect in
an industry based on differentiation, a fast-moving industry has no place for a bureaucratic top-
down business.
e.g. LT goal is to grow in sales 10%. It is very difficult in an industry where sales are in decline.
Clear and consistent long-term goals
Every company wants to maximize its value creation. That’s why, for every company, 3 main
objectives arise in formulating long-term goals:
1) Sales growth: expanding the amount of units sold
2) Sales margin: Increasing profit per product
3) Capital turnover and resource utilization: this component, calculated by dividing the sales by
capital invested in company, is a measure for the productivity of your investments by indicating
how many dollars in sales you have per dollar invested in the company. => In other words, invest
more productively
⇨ Universally, improving these components are imperative for becoming successful as company
The example of IBM
Competition shifted towards cheap models, towards low priced Asian companies.
so they shifted from hardware to software. There was much more differention available. Hardware
was more alike that’s why less profit margin.
,1) Revenue growth (=sales growth): By shifting to aster growing business and strategic sales itions
(buying company = buying future sales) => “Growth markets become 30% of geographic
revenue” & “invest $20 bil in acquisitions”
a. sailing more of the product they already have
b. growth by acquiring other companies
2) Operating Leverage (=Sales Margin): Focusing more on products that enable for higher profit
margins by global integration and process efficiencies => “Software becomes 50% of segment
profit”
Sales margin: what share can we keep as profit.
3) Capital turnover and Resource utilization: “Generate $8 bil in productivity through enterprise
transformation” (see example above)
IBM saw their competitive advantage fading away as Asian companies produces knock-offs in a
manner that was much more cost-efficient. Consequently, they shifted from hard to software
The example of McDonalds
“Focusing on growing sales with same capacity.”
This key objective mentions only two aspects of the three crucial elements. They want increase sales
with the capital already in place instead of expanding the business. This directly implies that the
company wants its capital turnover to grow (= selling more per restaurant).
The reason for not mentioning an increase in sales margin is the following: Mcdo has already
exhausted all opportunities to increase this margin. Increasing prices means handing over customers
to the competition. Cutting costs is probably not possible anymore as they have exhausted
economies of scale (for example, bargaining power) and meticulous optimization. So the only way
they can do better is by selling more.
Good understanding of the competitive environment
More specifically: A good understanding of all the (potentially) important determinants of industry
profitability
Note that an industry in itself is not the profitable entity. It is the aggregate of
profitable firms = average profitability of the firms active within the industry
These determinants can be positive as well as negative. In order to model these determinants,
corporations can use models:
- PESTEL (macro environmental: political, environmental, social, technological, environment, legal)
- Porter’s Five Forces:
A tool for identifying five forces that determine the competitive intensity and, therefore, the
attractiveness (or lack of it) of an industry in terms of its profitability. An "unattractive" industry
is one in which the effect of these five forces reduces overall profitability. The most unattractive
industry would be one approaching "pure competition", in which available profits for all firms are
driven to normal profit levels.
, Porter refers to these forces as the microenvironment, to contrast it with the more general term
macroenvironment. They consist of those forces close to a company that affect its ability to serve
its customers and make a profit.
Mostly, one focusses only on industry rivalry while you can also look at supplier and clients as
competing for your profit margins. Bargaining power of suppliers drastically affect sales margins.
Also, if it is easy to enter the market, existing companies have an incentive to keep prices down
as increasing them incentives entry, the same principle holds truth for substitutes.
1) Threat of entry: Profitable industries yielding high returns will attract new firms. New entrants
eventually will decrease profitability for other firms in the industry. Unless the entry of new firms
can be made more difficult by incumbents, abnormal profitability will fall towards zero (perfect
competition), which is the minimum level of profitability required to keep an industry in
business.
Capital requirements, economies of scale, government policies, customer loyalty, patents,… are
all components of an industry that either form barriers or gateways to access industries.
The easier it is for the company to enter, the less attractive industry will be.
2) Threat of substitutes: A product that uses a different technology to try to solve the same
economic need. For example, water and Pepsi are substitutes, but Pepsi and coke are not as they
use the same technologies (albeit different ingredients). This distinction is important as
campaigns for drinking water will probably decrease the total market profitability of soft drinks
while a campaign for Pepsi would grow that market profitability (It’s just Pepsi making it grow at
the expense of Coke)
Relative price performance of substitute, Buyer's switching costs, Perceived level of product
differentiation, Number of substitute products available in the market are factors affecting threat
of substitutes. The more substitutes, the more price sensitive the customer is. (prijsgevoelig, die
zal snel overstappen naar een goedkope product, consument is meer prijselastisch)
3) Supplier power: Suppliers of raw materials, components, labor, and services (such as expertise)
to the firm can be a source of power over the firm when there are few substitutes. If you are
making biscuits and there is only one person who sells flour, you have no alternative but to buy it
from them. You are dependent for them. Suppliers may refuse to work with the firm or charge
excessively high prices for unique resources.
, As a result, the supplier has more power and can drive up input costs and push for other
advantages in trade. On the other hand, when there are many suppliers or low switching costs
between rival suppliers, a company can keep its input costs lower and enhance its profits.
4) Buyer power: The ability of customers to put the firm under pressure, which also affects the
customer's sensitivity to price changes. Firms can take measures to reduce buyer power, such as
implementing a loyalty program. Buyers' power is high if buyers have many alternatives. It is low
if they have few choices.
A smaller and more powerful client base means that each customer has more power to negotiate
for lower prices and better deals. A company that has many, smaller, independent customers will
have an easier time charging higher prices to increase profitability.
5) Industry Rivalry: Positioning pertains to how the public perceives a product and distinguishes it
from competitors. A business must be aware of its competitors marketing strategy and pricing
and also be reactive to any changes made.
Level of advertising expense, Powerful competitive strategy, Firm concentration ratio and
sustainable competitive advantages are contributing factors
Example: Why is the tobacco industry more profitable than the airline industry?
- Tobacco:
● Buyer power is low do to price inelasticity of demand,
● supplier power is low (farmers and technology not hard to copy), The companies have a
lot of power, if one famer rises its price, they will buy from the another
● Industry rivalry is low because the industry is comprised of many brands owned by few
businesses (low competition),
● Threat of substitutes is low due to brand loyalty.
● Difficult to enter in the industry (ppl are loyal to one brand, marketing costs are high,
monopoly doesn’t let small companies enter the market)
Vs.
- Airline industry:
● A lot of competitors cause intense industry rivalry,
● Supplier power is high (low competition in the industry of manufacturers) + big oil and
airports having local monopolies,
● Buyer power is high due to near perfect information (little differention), fixed costs are
high (costs independent of amount of customers) => Incentive to attract customers is,
therefore, high1.
1
High fixed costs = fierce competition
The determination of long-term goals and objectives of an enterprise and the adoption of courses of
action and the allocation of resources necessary for carrying out these goals
The components of a successful strategy:
1) Clear and consistent long-term goals: This does not involve the operational decisions as they are
not the ultimate drivers of long-term success => What industry? What product? How r we going
to compete with other companies in same industry?
2) Good understanding of the competitive environment: Understand the fundamentals of the
industry as well as their evolution. Get insight in the key elements of industry success so
understand what negative/ positive aspects are embedded within it in order to eliminate or
exploit them. Who are the other companies? Our competitors?
3) Building the resources and capabilities and use them in order to achieve the goals, to develop
competitive advantage: in order to create value or bring down costs, a corporation will need the
necessary amount of resources (which other companies don’t have e.g. brand name,
manufacturing facilities. You must create competitive advantage otherwise you will go bankrupt.
4) Effective implementation: Bridge the gap between strategy and execution by organizing your
organization in such a manner that allows for that supportive infrastructure. You must have a
certain culture, structure,
5) Strategic fit between goals, environment, resources and capabilities, and implementation: Line
up your goals with the competitive environment: Being cost efficient does not have any effect in
an industry based on differentiation, a fast-moving industry has no place for a bureaucratic top-
down business.
e.g. LT goal is to grow in sales 10%. It is very difficult in an industry where sales are in decline.
Clear and consistent long-term goals
Every company wants to maximize its value creation. That’s why, for every company, 3 main
objectives arise in formulating long-term goals:
1) Sales growth: expanding the amount of units sold
2) Sales margin: Increasing profit per product
3) Capital turnover and resource utilization: this component, calculated by dividing the sales by
capital invested in company, is a measure for the productivity of your investments by indicating
how many dollars in sales you have per dollar invested in the company. => In other words, invest
more productively
⇨ Universally, improving these components are imperative for becoming successful as company
The example of IBM
Competition shifted towards cheap models, towards low priced Asian companies.
so they shifted from hardware to software. There was much more differention available. Hardware
was more alike that’s why less profit margin.
,1) Revenue growth (=sales growth): By shifting to aster growing business and strategic sales itions
(buying company = buying future sales) => “Growth markets become 30% of geographic
revenue” & “invest $20 bil in acquisitions”
a. sailing more of the product they already have
b. growth by acquiring other companies
2) Operating Leverage (=Sales Margin): Focusing more on products that enable for higher profit
margins by global integration and process efficiencies => “Software becomes 50% of segment
profit”
Sales margin: what share can we keep as profit.
3) Capital turnover and Resource utilization: “Generate $8 bil in productivity through enterprise
transformation” (see example above)
IBM saw their competitive advantage fading away as Asian companies produces knock-offs in a
manner that was much more cost-efficient. Consequently, they shifted from hard to software
The example of McDonalds
“Focusing on growing sales with same capacity.”
This key objective mentions only two aspects of the three crucial elements. They want increase sales
with the capital already in place instead of expanding the business. This directly implies that the
company wants its capital turnover to grow (= selling more per restaurant).
The reason for not mentioning an increase in sales margin is the following: Mcdo has already
exhausted all opportunities to increase this margin. Increasing prices means handing over customers
to the competition. Cutting costs is probably not possible anymore as they have exhausted
economies of scale (for example, bargaining power) and meticulous optimization. So the only way
they can do better is by selling more.
Good understanding of the competitive environment
More specifically: A good understanding of all the (potentially) important determinants of industry
profitability
Note that an industry in itself is not the profitable entity. It is the aggregate of
profitable firms = average profitability of the firms active within the industry
These determinants can be positive as well as negative. In order to model these determinants,
corporations can use models:
- PESTEL (macro environmental: political, environmental, social, technological, environment, legal)
- Porter’s Five Forces:
A tool for identifying five forces that determine the competitive intensity and, therefore, the
attractiveness (or lack of it) of an industry in terms of its profitability. An "unattractive" industry
is one in which the effect of these five forces reduces overall profitability. The most unattractive
industry would be one approaching "pure competition", in which available profits for all firms are
driven to normal profit levels.
, Porter refers to these forces as the microenvironment, to contrast it with the more general term
macroenvironment. They consist of those forces close to a company that affect its ability to serve
its customers and make a profit.
Mostly, one focusses only on industry rivalry while you can also look at supplier and clients as
competing for your profit margins. Bargaining power of suppliers drastically affect sales margins.
Also, if it is easy to enter the market, existing companies have an incentive to keep prices down
as increasing them incentives entry, the same principle holds truth for substitutes.
1) Threat of entry: Profitable industries yielding high returns will attract new firms. New entrants
eventually will decrease profitability for other firms in the industry. Unless the entry of new firms
can be made more difficult by incumbents, abnormal profitability will fall towards zero (perfect
competition), which is the minimum level of profitability required to keep an industry in
business.
Capital requirements, economies of scale, government policies, customer loyalty, patents,… are
all components of an industry that either form barriers or gateways to access industries.
The easier it is for the company to enter, the less attractive industry will be.
2) Threat of substitutes: A product that uses a different technology to try to solve the same
economic need. For example, water and Pepsi are substitutes, but Pepsi and coke are not as they
use the same technologies (albeit different ingredients). This distinction is important as
campaigns for drinking water will probably decrease the total market profitability of soft drinks
while a campaign for Pepsi would grow that market profitability (It’s just Pepsi making it grow at
the expense of Coke)
Relative price performance of substitute, Buyer's switching costs, Perceived level of product
differentiation, Number of substitute products available in the market are factors affecting threat
of substitutes. The more substitutes, the more price sensitive the customer is. (prijsgevoelig, die
zal snel overstappen naar een goedkope product, consument is meer prijselastisch)
3) Supplier power: Suppliers of raw materials, components, labor, and services (such as expertise)
to the firm can be a source of power over the firm when there are few substitutes. If you are
making biscuits and there is only one person who sells flour, you have no alternative but to buy it
from them. You are dependent for them. Suppliers may refuse to work with the firm or charge
excessively high prices for unique resources.
, As a result, the supplier has more power and can drive up input costs and push for other
advantages in trade. On the other hand, when there are many suppliers or low switching costs
between rival suppliers, a company can keep its input costs lower and enhance its profits.
4) Buyer power: The ability of customers to put the firm under pressure, which also affects the
customer's sensitivity to price changes. Firms can take measures to reduce buyer power, such as
implementing a loyalty program. Buyers' power is high if buyers have many alternatives. It is low
if they have few choices.
A smaller and more powerful client base means that each customer has more power to negotiate
for lower prices and better deals. A company that has many, smaller, independent customers will
have an easier time charging higher prices to increase profitability.
5) Industry Rivalry: Positioning pertains to how the public perceives a product and distinguishes it
from competitors. A business must be aware of its competitors marketing strategy and pricing
and also be reactive to any changes made.
Level of advertising expense, Powerful competitive strategy, Firm concentration ratio and
sustainable competitive advantages are contributing factors
Example: Why is the tobacco industry more profitable than the airline industry?
- Tobacco:
● Buyer power is low do to price inelasticity of demand,
● supplier power is low (farmers and technology not hard to copy), The companies have a
lot of power, if one famer rises its price, they will buy from the another
● Industry rivalry is low because the industry is comprised of many brands owned by few
businesses (low competition),
● Threat of substitutes is low due to brand loyalty.
● Difficult to enter in the industry (ppl are loyal to one brand, marketing costs are high,
monopoly doesn’t let small companies enter the market)
Vs.
- Airline industry:
● A lot of competitors cause intense industry rivalry,
● Supplier power is high (low competition in the industry of manufacturers) + big oil and
airports having local monopolies,
● Buyer power is high due to near perfect information (little differention), fixed costs are
high (costs independent of amount of customers) => Incentive to attract customers is,
therefore, high1.
1
High fixed costs = fierce competition
