This quarter, I’m taking Corporate Strategy. Having taken undergraduate Corporate Strategy, I find it always interesting to re-take an intro course and see how a subjective, ambiguous topic like Corporate Strategy is taught differently.
Featured photo is a picture of Point Lobos State Park in California. It represents Blue Ocean strategy.
What is corporate strategy?
Corporate strategy is about choices – the choices you choose and the choices you don’t choose are equally important. It’s about where you’re going to play, how you’re going to do it with your resources, and why you, among all the competitors, are uniquely positioned to win it. Strategy stems from warfare and typically the general was in charge of strategy. It’s about understanding all external competitive forces and internal forces (strengths, weaknesses, resources, capabilities) and then synthesizing a clear plan, NOT a vision or goal or mission. Growing revenue is not a strategy. Having the best customer service is also not a strategy.
What is Porter’s Five Forces? What is it used for?
Harvard professor Michael Porter came up with Porter’s Five Forces to analyze an industry’s profitability or rather the article was titled “The Five Forces that Shape Industry Competition.” There are five major competitive forces at play to see if an industry is attractive or not: competitors/degree of rivalry, supplier power, buyer/customer power, substitutes, and threat of new entrants.
To address the 5 forces, Porter suggests:
- Positioning your company where forces are the weakest
- Exploit changes in the forces
- Reshape the forces in your favor
5 Forces: Understand the force, identify root cause, anticipate profitability over time
- Threat of New Entrants
- Puts a cap on profit potential of an industry
- The threat of new entrants is determined by the height of the barriers to enter.
- Seven barriers to entry:
- supply-side economies of scale, firms that produce larger volumes enjoy lower costs per unit because fixed costs are spread over more units, they have more efficient technology, or have better terms with suppliers
- demand-side benefits of scale, network effects, where buyer’s willingness to pay for a company’s product increases with the number of other buyers who also patronize the company
- customer switching costs: fixed costs that buyers face when they change suppliers
- capital requirements: need to invest large financial resources in order to compete and enter
- Incumbency advantages independent of size, could stem from technology
- Unequal access to distribution channels
ROIC – Return on invested capital – measure of profitability for strategy formulation.
Counter arguments or rather complements to Porter’s five forces include the PEST (political, economic, social, technological) framework with scans the large environment and general influences beyond industry and the 6th force of complements.
- Position: where to compete
- Plan: a guide to action
- Perspective: understanding customers
- Pattern: coherent set of decisions executed with commitment
- Ploy: how to out-smart your rivals
Strategy is about choice. Creating a unique activities that fit together and produce trade-offs that propels the firm to create more value than rivals (competitive advantage).
- Unique: Choice of activities must be unique
- Fit: Choices must produce complementarity, top-down strategy
- Trade-offs: costly choices of what not to do
- Economic logic: low cost, differentiation, value innovation
- Arenas: where to play
How can a company create competitive advantage? VRIO, Porter’s Five Forces, Barriers to competition, Beating rivals. Consider a company and it’s long-term and changing environment, not just static environment to make choices.