Basic elements of strategy. 101 notes on strategy elements. http://taposh.gitbooks.io/basic-elements-of-strategy-framework/content/

2. 1. Introduction
2. Contents
3. What is Strategy?
4. Elements of Strategy
5. Market Competitive Forces
6. Market Competition
7. Firm : Resource Based View
Table of Contents
Basic Elements of Strategy Framework
2

3. Organization strategy is very important topic for aspiring managers, entrepreneurs, social entrepreneurs, analysts,
consultants and business leader. This note is a collection of my learnings and readings from various sources. These notes
explore the underlying theory and frameworks that provide the foundations of a successful business strategy. These notes
will help one to develop ability to think strategically by providing you the tools for conducting a strategic analysis. Strategic
analysis is critical for analyzing the competitive context in which an organization operates and for making reasoned and
reasonable recommendations for how that organization should position itself and what actions it should take to maximize
value creation.
Special thanks. Prof. Gina Dokko of UC Davis’s GSM School of business, under whom I was initiated to learn more.
Author’s Note:
Basic Elements of Strategy Framework
3Introduction

4. Definition
SWOT Analysis
Elements of Strategy
Starbuck's Elements of Strategy
Porter's 5 Forces
Concentration Ratio CRx
Herfindahl–Hirschman Index (HHI)
Comparison of Herfindahl Index & Concentration Ratio
Relative Bargaining power
What are Resources?
What is Resource Based View (RBV)?
Summary
Book Chapters
Part 1 : Strategy
What is Strategy?
Elements of Strategy
Market Competitive Forces
Measuring Market Competition
Resource Based View
Basic Elements of Strategy Framework
4Contents

5. Strategy is the plan to win. Lately it has become a catch all term used to mean whatever one wants it to mean. However a
well crafted strategy is one that the following characteristics –
1. Presents an integrated plan to win
2. Clearly articulates the source of sustainable competitive advantage.
3. Guides action and decision making at all levels
Frameworks and models help structure the information. They provide a set of categories that describes “what”, or a
simplified view of realty that explains “why” or “how”. These frameworks and models are used for situation analysis and
prediction. A few of these are – SWOT, Strategy diamond, Porter’s 5 forces, Resource Based View (RBV), Value chain and
Strategy/CSR.
This stands for Strengths, Weakness, Opportunities and Threats. Strengths and weakness are internal to the organization
while opportunities and threats are external. The problem with this framework is it does not tell us what to do.
What is Strategy?
SWOT Analysis
Basic Elements of Strategy Framework
5What is Strategy?

6. The five elements of strategy are the necessary parts that need to be answered to have a viable strategy –
1. Arenas : where will be active?
2. Vehicles : how will we get there?
3. Differentiators : how will we win in the market place?
4. Staging : what will be our speed and sequence of moves?
5. Economic logic : how will we obtain our returns.
1. Which are the product categories?
2. Which market segments?
3. Which geographic areas?
4. Which core technologies?
5. Which value-creation stages?
1. Internal development
2. Joint Ventures
3. Licensing or Franchising?
4. Acquisitions?
Elements of Strategy
Arenas: - Where will be active and with how much emphasis?
Vehicles: - How will we get there?
Differentiators : - How will we win?
Basic Elements of Strategy Framework
6Elements of Strategy

7. 1. Image?
2. Customization?
3. Price?
4. Styling?
5. Product reliability?
1. Speed of expansion?
2. Sequence of initiatives?
Note :Plot XY plots (perception maps) to find out where you are and where you want to be.
1. Lowest costs through scale advantages?
2. Lowest costs through scope and replication advantages
3. Premium prices due to unmatchable service?
4. Premium prices due to proprietary product features
The heart of business logic must be a clear idea of how profits will be generated – not just profits, but profits above the
firm’s cost of capital.
Staging : What will be our speed and sequence of moves?
Economic logic : How will be obtain our results?
Starbuck's Elements of Strategy
Basic Elements of Strategy Framework
7Elements of Strategy

8. In 1979, Michael E. Porter, published an article in Harvard Business Review titled “How Competitive Forces Shape
Strategy”. This paper created a revolution in industry. These five forces came to be known as "Porter's 5 forces". These are
the 5 forces that shape industry competition
1. Threat of New entry
2. Bargain power of buyers
3. Threat of substitutes
4. Bargain power of sellers
5. Intensity of Rivalry
The picture below details each of the 5 forces:
Market Competitive Forces
Basic Elements of Strategy Framework
8Market Competitive Forces

9. Porter’s traditional model did not recognize information technology (IT) as a distinctive competitive force, but IT was only
considered as a means of supporting the five forces. This deficiency of Porter’s model was reported by Schertler (1984)
who attempted to analyze how IT can affect the five competitive forces. Likewise, McFarlan (1984) and Thurlby (1998)
considered IT as a way to achieve competitive advantage and refined Porter’s model to incorporate an IT dimension. As
McFarlan (1984) suggested by adding to the product an IT context, could result in increased power of the organization,
reduced cost and add value to the product. All these will create barriers to new entrants or substitute products to enter
successfully the market. Therefore, IT has now been recognized as a force in its own right (Thurlby 1998).
Further, government regulation impacts the competition in the country. In this new global market government regulation is a
strong strategic force that should be kept in consideration.
Basic Elements of Strategy Framework
9Market Competitive Forces

10. Basic Elements of Strategy Framework
10Market Competitive Forces

11. The degree of competition in a market is commonly measured using market shares, the concentration index (CRx), the
Herfindahl index (HHI) and the price-cost margin. In 2000, Jan Boone[1] suggested an alternative measure, based on
relative profits, which is more robust to the different ways in which competition can be parameterized in theory. In this
chapter we will discuss Concentration Index (CRx), Herfindahl Index (HHI) and Relative profit as suggested by Boone.
Concentration Ration CRx is defined as the market share held by the x largest firms. In economics the concentration ratio is
defined as a ratio that indicates the relative size of firms in relation to their industry as a whole. Low concentration ratio in
an industry would indicate greater competition among the firms in that industry than one with a ratio nearing 100%, which
would be evident in an industry characterized by a true monopoly.
The concentration ratio indicates whether an industry is comprised of a few large firms or many small firms.
The Four-Firm Concentration Ratio measures the total market share of the four largest firms in an industry.
The Eight-Firm Concentration Ratio measures the total market share of the eight largest firms in an industry.
The concentration ratio is the percentage of market share held by the largest firms (m) in an industry.
CRm= Σmi=1 si
Therefore it can be expressed as:
CRm = s1 + s2 + .... + sm
where si is the market share and m defines the ith firm
Concentration ratios range from 0 to 100 percent. The levels reach from no, low or medium to high to "total" concentration.
No concentration 0% means perfect competition or at the very least monopolistic competition. If for example CR4=0 %, the
four largest firm in the industry would not have any significant market share. Total concentration 100% means an extremely
concentrated oligopoly.
When concentration is 100%, there is a monopoly.
Low concentration 0% to 50%. This category ranges from perfect competition to oligopoly.
Medium concentration 50% to 80%. An industry in this range is likely an oligopoly.
High concentration 80% to 100%. This category ranges from oligopoly to monopoly.
The definition of the concentration ratio does not use the market shares of all the firms in the industry and does not provide
the distribution of firm size. It also does not provide a lot of detail about competitiveness of the industry. The concentration
ratios just provide a sign of the oligopolistic nature of an industry and indicate the degree of competition The Herfindahl
index provides a more complete picture of industry concentration than does the concentration ratio.
The Herfindahl index [2] (also known as Herfindahl–Hirschman Index, or HHI) is a measure of the size of firms in relation to
the industry and an indicator of the amount of competition among them. Named after economists Orris C. Herfindahl and
Measuring Market Competition
Concentration Ratio CRx
Problems with Concentration Ratio
Herfindahl–Hirschman Index (HHI)
Basic Elements of Strategy Framework
11Market Competition

12. Albert O. Hirschman, it is an economic concept widely applied in competition law, antitrust and also technology
management.
It is defined as the sum of the squares of the market shares of the 50 largest firms (or summed over all the firms if there are
fewer than 50) within the industry, where the market shares are expressed as fractions. The result is proportional to the
average market share, weighted by market share. As such, it can range from 0 to 1.0, moving from a huge number of very
small firms to a single monopolistic producer. Increases in the Herfindahl index generally indicate a decrease in competition
and an increase of market power, whereas decreases indicate the opposite. Alternatively, if whole percentages are used,
the index ranges from 0 to 10,000.
The major benefit of the Herfindahl index in relationship to such measures as the concentration ratio is that it gives more
weight to larger firms.
For instance, two cases in which the six largest firms produce 90% of the goods in a market:
Case 1: All six firms produce 15% each, and
Case 2: One firm produces 80% while the five others produce 2% each.
We will assume that the remaining 10% of output is divided among 10 equally sized producers. The six-firm
concentration ratio would equal 90% for both case 1 and case 2. But the first case would promote significant
competition, where the second case approaches monopoly.
The Herfindahl index for these two situations makes the lack of competition in the second case strikingly clear:
Case 1: Herfindahl index = 6 0.152 + 10 0.012 = 0.136 (13.6%)
Case 2: Herfindahl index = 0.802 + 5 0.022 + 10 0.012 = 0.643 (64.3%)
This behavior rests in the fact that the market shares are squared prior to being summed, giving additional weight to firms
with larger size. The index involves taking the market share of the respective market competitors, squaring it, and adding
them together (e.g. in the market for X, company A has 30%, B, C, D, E and F have 10% each and G through to Z have 1%
each). If the resulting figure is above a certain threshold then economists consider the market to have a high concentration
(e.g. market X's concentration is 0.142 or 14.2%). This threshold is considered to be "0.25" in the U.S., while the EU
prefers to focus on the level of change, for instance that concern is raised if there is a "0.025" change when the index
already shows a concentration of "0.1."
So to take the example, if in market X company B (with 10% market share) suddenly bought out the shares of company C
(with 10% also) then this new market concentration would make the index jump to 0.162. Here it can be seen that it would
not be relevant for merger law in the U.S. (being under 0.18) or in the EU (because there is not a change over 0.025).HHI
over 1800 is generally considered to be concentrated while under 1000 is considered unconcentrated
HHI = Σsi^2 taken over i to N
where si is the market share of firm i in the market, and N is the number of firms.
Thus, in a market with two firms that each have 50 percent market share, the Herfindahl index equals 0.50^2+0.50^2 = 1/2.
The Herfindahl Index (H) ranges from 1/N to one, where N is the number of firms in the market. Equivalently, if
percents are used as whole numbers, as in 75 instead of 0.75, the index can range up to 1002, or 10,000.
Justice department guidelines [3]:
Comparison of Herfindahl Index & Concentration Ratio
Values of Herfindahl–Hirschman Index
Basic Elements of Strategy Framework
12Market Competition

13. A HHI index below 0.01 (or 100) indicates a highly competitive index.
A HHI index below 0.15 (or 1,500) indicates an unconcentrated index.
A HHI index between 0.15 to 0.25 (or 1,500 to 2,500) indicates moderate concentration.
A HHI index above 0.25 (above 2,500) indicates high concentration
A small index indicates a competitive industry with no dominant players. If all firms have an equal share the
reciprocal of the index shows the number of firms in the industry. When firms have unequal shares, the reciprocal of the
index indicates the "equivalent" number of firms in the industry. Using case 2, we find that the market structure is equivalent
to having 1.55521 firms of the same size.
The Herfindahl index ranges from 1/N to one, the normalized Herfindahl index ranges from 0 to 1. It is computed as:
H* = (H -1/N)/(1-1/N)
where again, N is the number of firms in the market, and H is the usual Herfindahl Index, as above.
A competitive analysis of an industry focuses on a key variable: Relative Bargaining Power
Relative bargaining power is the ability to get others to do what you want, to bargain hard for higher prices or lower
costs
Power accrues to firms when they have something of value to others and they can maintain their added value
Substitutes are about the size of the pie Other four forces are about division of pie
Things to remember about using Five Forces…
Framing is vital – About the industry, not the firm – Definition of industry is subjective, but important
Not all forces are created equal – Relevance of each force will change from industry to industry: dig into the ones that
matter
Buyers and suppliers can go multiple levels deep
Questions to Ponder
Normalized Herfindahl index
Relative profit as Indicator
Relative Bargaining power
Basic Elements of Strategy Framework
13Market Competition

14. What is the main point of the Five Forces Model?
You can’t make money in an industry where the five forces are strong?
What do industry concentration measures like CR4 and HHI have to do with the Five Forces Model?
Industry concentration measures quantify intensity of rivalry Note: Price is not a valid axis for strategic group analysis
References
[1] http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1307004
[2] http://econpapers.repec.org/article/fipfedgrb/y_3a1993_3ai_3amar_3ap_3a188-189_3an_3av.79no.3.htm
[3] http://www.justice.gov/atr/public/guidelines/hmg-2010.html
[4]https://ideas.repec.org/a/mhr/jinste/urnsici0932-4569%28200812%291644_587ctpaem_2.0.tx_2-r.html
[5] https://hbr.org/2008/01/the-five-competitive-forces-that-shape-strategy
[6] http://essay.utwente.nl/65339/1/D%C3%A4lken_BA_MB.pdf
Basic Elements of Strategy Framework
14Market Competition

15. In a perfect competition, Profit ~ 0. Resources and capabilities interface between strategy and the firm.
Resources and capabilities are the source of Sustainable competitive advantage (SCA).
http://smallbusiness.chron.com/difference-between-value-chain-analysis-resourcebased-analysis-50113.html
Resources can be broadly defined as all assets, capabilities, organizational processes, firm attributes, information, &
knowledge that enables a firm to conceive of and implement strategies that improve its efficiency and effectiveness.
[Barney]
Resources can be specifically classified as –
1. Tangible Assets ( e.g. financial resources, real estate, plant and equipment)
2. Intangible Assets ( e.g. IP, research capabilities, culture, brand)
3. Human resources
Capabilities can be specifically classified as – The ability to do something productive with the resources
1. Ability of organization to perform some complicated task that involves the combination and co-ordination of multiple
resources.
2. Organizational level abilities involving interactions among multiple people as well as machines, systems etc.
Seeing the resources and capabilities of the firm as the fundamental “fact” of the firm. a. Not (primarily) about the markets
or customers (Marketing) b. Not (primarily) about the competitors or industry (Porter’s 5 forces)
Managers should focus on building and managing strategic resources and capabilities. Resources and capabilities can
confer advantage in a wide variety of markets and contribute to a wide variety of end product benefits.
Resource Based View
What are Resources?
What is Resource Based View (RBV)?
Basic Elements of Strategy Framework
15Firm : Resource Based View

16. To analyze resource based view we can use the framework provided by Prahalad and Hamel.
When do strategic resources or capabilities create sustainable competitive advantage (SCA)? When they are –
1. Valuable – Resources that enable a firm to conceive or implement strategies for efficiency or effectiveness
2. Rare – Resources possessed by many other firms cannot be sources of SCA
3. Inimitable – Because of unique historical conditions, causal ambiguity, and/or social complexity
4. Non-Substitutable – No strategically equivalent substitutes that other firms can use to implement the same strategy.
Note: Cash Reserves are never a strategic resource.
Basic Elements of Strategy Framework
16Firm : Resource Based View

17. Resources and capabilities offer a different perspective that can solve some mysteries in analyzing companies. Some
firms don’t have a real structural advantage, and do not have secret processes that provide advantage, but succeed
year after year.
Frame work to think for Sustainable Competitive advantage – VRIN
Resources and capabilities are building blocks for diversification (corporate strategy) Apple started as PC
manufacturer, what is it now? If you were Toyota, what business areas would you expand into? – Process Consulting
*Provides a way to evaluate first mover (dis)advantages.
Be careful that resources don’t turn into rigidities.
Corporate Strategy: Where do you draw the line around the firm?
1. Vertical Scope (Integration) : What range of value adding activities should the firm encompass? Nike vs Disney
2. Product Scope (diversification) : How specialized should a firm be in its offerings e.g. GE vs Gap
3. Geographic Scope – What is the optimal spread of activities e.g. Popeyes vs McDolands
Diversification
What are the essential tests for diversification?
Summary
Basic Elements of Strategy Framework
17Firm : Resource Based View