Example of a low cost strategy in ecommerce

In my strategy class we have talked about there only being room for one successful low-cost strategy company in each industry. Boxed could be an example. They only sell around 600 necessities (e.g. diapers, toilet paper), but in larger packs compared to Amazon. The company claims that if customers buy in larger quantity, prices can be up to 20% lower than Amazon. To accomplish such low prices the company needs to be very cost focused. For instance: they only have an iphone/android application, no website, they only deliver to a few US states that are densely populated.

HTC shifted from a unique strategy to a copy-cat strategy, guess what happened?

There are strong forces towards conformity in society; for instance individuals dress in similar fashion and eat similar food. Human beings are social animals and it is easier for us to belong if we conform. I am not denying the existence of non-conformity, just stating that there are forces towards conformity in society.

A similar force towards conformity can be found among companies strategies. Academics use the fancy word isomorphism to describe the situation. Isomorphism can be created by CEOs having similar background, CEOs copying seemingly successful companies, CEOs' compensation contract, government regulation, and a number of other factors. This note will illustrate the disastrous effect of isomorphism on HTC, a company producing mobile phones.

Book review: "The Circle"

David Eggers have written a fascinating book about the future of work and social life. The book is a futuristic novel, but it could equally well be considered a business book. I will not be surprised if The Financial Times will short-list this book for its annual business book award.

Strategy assessment - initial perspective

Strategy is about a consistent set of policies that has a good fit with the external environment. It could take several years to perfect a strategy. Unfortunately, every time a company changes its strategy it risks getting a misfitting new strategy. Despite the difficulties it is sometimes necessary to change a strategy. This note will look at successful and unsuccessful changes to a company's strategy, and how the stock market tends to evaluate these changes.

Economies of scale and economies of scope

This note is primarily directed to students. It is the third in a series on strategic cost analysis. Economies of scope is a term related to economies of scale. I will argue that economies of scope is not a very helpful concept in strategic management.

Apologies, but this note is not very structured :)

Economies of scale and capacity utilisation (economies of capacity)

This note is primarily directed to students. It is the second in a series on strategic cost analysis. Economies of scale is defined as a company's cost per unit being lower when the it produces at a larger volume. This note explains the difference between economies of scale and a related concept called capacity utilisation. Capacity utilisation refers to how much of the existing capacity is used for production.

Economies of scale

This note is primarily directed to students. It is the first in a series on strategic cost analysis. One of the most important cost drivers is economies of scale . A key point to note is that diseconomies of scale, which textbook authors like to describe, hardly exist in the real world.

How to pick a good management book

A Business Week article last year mentioned that 11,000 management books are published each year (here). I can't believe this number, but even 1,100 books per year would be a lot. Thinking about it, even 110 books are too many too read. Actually, 11 business books are probably also too many to read in a year. So should you even bother reading management books? Nassim Taleb (on his third book, see below) concludes "I don't read business books and I almost never talk to anyone who reads them". In fact, this sentiment is common even among many managers. Personally, I think a good target for most of us is to read one to three business books per year. With such a limited target you need to do quite a bit of research before you decide what to read. Your time is valuable.

Naive shareholders taken for a ride?

A few recent corporate governance transactions are worrying. Is this evidence of a new variant of the old principal/agent conflict? This conflict occurs when the CEO (agent) and the owners (principal) of the company have different interests? Here are two recent examples:

• Dell. Michael Dell CEO of Dell drives the share price of Dell down by poor management. Then he makes a bid for the whole company together with a private equity consortium. Michael Dell will remain as CEO and now he will be able to turn around the company that he was not able to turn around in the preceding years. Comment: If Mr Dell will be so good at fixing Dell, why couldn't he fix the company when he was CEO? His claim that the stock market would not allow him to take the necessary actions is just not credible
• Nokia. Stephen Elop CEO of Nokia and a former high level executive at Microsoft stops development of Nokia's Symbian operating system and focuses on the Windows Phone. Before Nokia has staged a turnaround, he negotiates a sale of Nokia's mobile phone division to Microsoft. Microsoft gets the mobile phone division cheaply and Elop moves back to Microsoft. Comment: Nokia and Microsoft are in the same boat and both need the Windows smartphone to be a success. Why would Mr Elop sell the mobile phone business to Microsoft before the Nokia turnaround is complete? It is true that Nokia is dependent on Microsoft, but the reverse is equally true. Why is it good for Nokia's shareholders that Mr Elop completes the turnaround after being hired by Microsoft?

Book review: "Ten types of innovation"

The consulting group Doblin in Chicago has published a book on the innovation process in companies. Their main point is that each real life innovation should utilise three to five out of a total of ten ideal types of innovation. This will maximise the chances of commercial success. Here are the ten types:

Microsoft's future

In an earlier positing (here), I described how Microsoft's now outgoing CEO Steve Ballmer talked about Microsoft being a consumer company, despite having only around 15% of sales to consumers. Windows is mostly bought by OEMs (original equipment manufacturers) and Office by corporations. Since Microsoft is invoicing corporations and not consumers, it is a business-to-business company whatever the CEO is saying. Very few consumers make an active choice to buy Windows or Office. Consumers actively buy Playstation and Skype services but those products are a small portion of Microsoft's revenues.

Are there too many retail shops in Singapore?

During the last couple of years it has been harder for lower skilled foreigners to get work permits in Singapore. A lot of small and medium sized firms are complaining about the difficulty of finding staff. The government is not changing the new policy. Is it doing the right thing?

Does the stock market put pressure on companies to reduce R&D?

The field of finance used to be very dogmatic regarding the efficiency of financial markets. Kuhn (The Structure of Scientific Revolutions) said that new paradigms only surface when the older generation of researchers die. The generation of arrogant, efficient-market fundamentalists in finance is now largely gone. Younger researchers document many interesting phenomena. There is not yet a new paradigm, though. This post looks at how companies' R&D effort change when they are subject to stock market pressure.

What is an entry barrier?

New entry into an industry will increase the number of competitors, which in turn will increase rivalry in subsequent time periods. It is possible to estimate the likelihood that new entry will happen by assessing the size of the barriers to entry.

This is post nine in a series on industry analysis.

JC Penney share price back on 1986 levels

JC Penney just fired Ron Johnson, its less than competent CEO (good article here). His tenure is a classic example of how to destroy a company by bad strategy and bad management. None of this analysis is based on hindsight, but on a student report from March 2012. Since the student report, the company has underperformed index with 74%.

Will Facebook Home increase Facebook's revenue?

Facebook has just introduced the Facebook Home application for a selected set of Android smartphones from Samsung and HTC. Is this a good idea?

Book review: "Good strategy bad strategy"

Dick Rumelt was my prof in Strategy when I did my MBA at INSEAD. I was quite impressed by him, but always wondered why he did not write a book. Now he has written that book. It is a good, but only for a niche audience.

Corporate government advice from Singapore

Can the government of Singapore have something to teach the world of corporate governance in large listed companies? I think so. It used to be the case that the retiring Prime Minister became Senior Minister.

In defense of "Built to Last"

Jim Collins and Jerry Porras wrote Built to last: successful habits of visionary companies back in 1994. The book has sold millions of copies. It identified 18 great companies and compared them to 18 merely good companies. Based on this research, the authors identified a number of management principles. I would not recommend reading the book today, but I want to defend the book in this posting.

Bargaining power of suppliers

Each supplying industry has to be evaluated separately. The first focus should be on supplying industries that represent a large portion of total cost for the focal industry. This posting will highlight the main drivers of supplier power.

This is post eight in a series on industry analysis.

Bargaining power of buyers

A pre-condition for bargaining power is that the buyers are price-sensitive. This post will look into the structural factors that make a buyer price sensitive. As a result, corporate buyers can have low to high bargaining power, while consumers can only have low and medium bargaining power.

This is post seven in a series on industry analysis.

US bailouts of companies during 2008-09

This post will only look at the direct costs related to the USD 606B bailout during 2008-09 financial crisis. So far 40% of this amount has been paid back. Propublica is tracking the repayment of the bailouts (here). Here is a summary of all the bailouts and how much has been repaid.

Book review: "The lords of strategy"

Kiechel published The Lords of Strategy in 2010. This is a fun reading if you would like to know more about the history of management consulting. My last book review was about a book published in 1994 (here). I argued that one should consider that book as management consulting history too. The current book is actually taking a historical focus and roughly covers the formative years from 1965 to 1985.

The book is well-written and I give it four out of five stars.

Restore the role of owners in the capitalist system

A quite interesting article about corporate governance in Sweden from Financial Times (here, probably behind pay wall). The article has this to say about the Anglo-Saxon model:

[T]he Anglo-American model where dispersed ownership among thousands of investors means shareholders usually have little power, with votes at annual meetings often resembling Soviet-era elections

License to print money through bargaining power

I am reading in Straits Times how Visa is putting pressure on the taxi operator ComfortDelgro to stop charging a 10% surplus for Visa payments (here). I am impressed by Visa's public relations department. They make Comfort look like the bad guy and Visa seems to be on the consumer's side.

Vietnam and Sweden

I recently visited Vietnam and growing up in Sweden I was aware that Sweden was very generous in economic help to the Socialist Republic of Vietnam in the 1970s and 1980s. At least that is what I was proudly told by my school teachers. Investigating the question a bit further I found a long self-congratulatory report written by SIDA, the Swedish Government Foreign Aid Agency, which administers all foreign aid.

Industry rivalry

The most destructive kind of competition for an industry is price competition. Several structural factors influence the likelihood that the industry will be characterised by price competition.

This is post six in a series on industry analysis.

Social entrepreneurship is good for society

My blog is really about business strategy, but I have given my view on corporate social responsibility so I thought I should also balance the discussion by commenting on social entrepreneurship, which is something totally different.

Corporate social responsibility is bad for society

One of the most trendy topics in management research is corporate social responsibility. Trendy topics attract a lot of muddled thinking and muddled thinking can be dangerous. I think the focus on corporate social responsibility is outright bad.

Threat of substitutes

Substitutes to the products and services offered by the focal industry can be a serious threat to profitability or, in some cases, even the survival of the focal industry. Customers buy products to fulfil their needs. A product can satisfy a need, but so can the substitutes to the product. It is important to understand the needs a product fulfils before the full range of substitutes can be identified. This was first noted by Ted Levitt in a classic article:

The railroads did not stop growing because the need for passenger and freight transportation declined. That grew. The railroads are in trouble today not because that need was filled by others (cars, trucks, airplanes, and even telephones) but because it was not filled by the railroads themselves. They let others take customers away from them because they assumed themselves to be in the railroad business rather than in the transportation business. The reason they defined their industry incorrectly was that they were railroad oriented instead of transportation oriented; they were product oriented instead of customer oriented. (Harvard Business Review, 1960)

This is post five in a series on industry analysis.

Groupon - find another company like this and you will be rich

Groupon's CEO Andrew Mason has finally resigned after one of many terrible quarterly reports (here).

After four and a half intense and wonderful years as CEO of Groupon, I've decided that I'd like to spend more time with my family. Just kidding - I was fired.  

The stock market did not like Mason, so the share price might get a boost in the coming weeks. Longer term, the company has already lost almost everything, and it is possible that a new CEO will create a successful new strategy for the company. This post will look at the old strategy of Groupon.

Two groups of student in my Strategy class picked Groupon as a future big loser back in March 2012. After the students' analysis the company is down 77%. My analysis below presents a synthesis of the students' arguments of one year ago.

Yahoo is getting innovative - no more telecommuting

Melissa Mayer took over as CEO of Yahoo in July 2012. At the time, I was sceptical when the board picked the third new CEO in just two years. The fact that the previous two CEOs had been fired reflected badly on the board's ability to select a new CEO. However, the stock market has been quite positive concerning Mayer's ability to turn around Yahoo (share price up 23% more than index during her tenure).

The five forces framework

The most known framework in strategic management is the five forces framework. The five forces are: bargaining power of suppliers, bargaining power of buyers, industry rivalry, threat of entry, and threat of substitutes. I will discuss these forces in more detail in later postings. In the current posting I will provide a broader perspective. It is useful to consider the five forces as five evil forces that are after the profit generated in the industry. If all the five evil forces are strong then most of the profit generated in the industry will be taken away by these evil forces.

This is post four in a series on industry analysis.

Microsoft has a long way to go

Steve Ballmer, CEO of Microsoft, is being interviewed in MIT's Technology Review. The interviewer summarises his impression of Google's vision as "indexing the world's information" and Apple's as making "insanely great devices for consumers". Ballmer responded with Microsoft's vision:

We empower people and businesses to realize their potential. And to expand, I would simply say we’re about defining the future of productivity, entertainment, and communication.

I am reminded of an old, failed Sony vision about providing the networked home. Companies do not make money by formulating nice or catchy vision statements. Companies make money by having clear corporate and business-unit strategies and then executing well. However, Ballmer's statement is simply too general to be a good vision, and I hope Microsoft's strategies are much sharper.

In defence of planned strategy

A long-standing tension among academic management thinkers has been between proponents of planned strategy and proponents of emergent strategy. In the caricature version, the planned strategy is determined on the top executive floor by a cadre of analytical, numbers-driven, MBA-holding employees in their 30s. They produce fancy reports full of tables, graphs, boxes and arrows. In the caricature version, the emergent strategy just happens when middle managers in their 40s and 50s, with lots of practical experience in the industry, decide to do something novel. These middle managers are free from the shackles of analytical thinking, instead they succeed through honorable trial and error learning. Often the debate between the two perspectives is held on a sandbox level.

Industry vs industry segment

In an earlier posting I noted that "the industry definition should capture a set of related companies selling similar kind of products". In this posting I would like to develop the idea of an industry consisting of several industry segments. I would also like to describe how an industry segment is related to terminology used in marketing (e.g. product category, product type, product version).

This is post three in a series on industry analysis.

Book review: "The Value Imperative"

Taggart, Kontes & Mankins published The Value Imperative in 1994. Why am I recommending that you read a 19 year old book? Well, age should not be a major consideration in the first place, but here are my reasons.

Industry supply chains

The industry supply chain is a description of suppliers and buyers around your focal industry. It is important to spend some time identifying the structure as there often are stages in the industry supply chain that are less visible and often missed.

This is post two in a series on industry analysis.

Considerations before an industry analysis

Industry analysis is an important tool for the strategist. This post will explain the importance of conducting an industry analysis as well as considerations you have to deal with before you can start your detailed analysis.

Industry attractiveness

The standard reason given to conduct an industry analysis is to understand whether an industry is attractive or not. This is a rather silly reason. If all you are interested in is attractiveness, the best approach is to look at industry average profitability. Finance Professor Aswath Damodaran has a very nice website from which I extracted the following information. The table shows the ten most profitable and ten lest profitable industries in four geographic markets (return on invested capital, banking is excluded, data from financial year 2011, unweighted average). Ideally, I would like weighted ten year average, but that can be calculated relatively easy.

Grocery retailing in Singapore - an illustration of generic strategies

This post will use the grocery retailing industry in Singapore as an illustration of basic strategic management concepts; in particular the notion of generic strategies (Porter, 1980, chapter 2). First some background information on the market.

Book review: "Playing to Win" and "Competitive Strategy"

From time to time I will provide some book recommendations. I will rate the books using amazon's scale of one to five stars. I will mostly rate books four (very good) or five stars (masterpiece), because there is a selection bias; I will mainly highlight books that I think you should read. I am going to put links to amazon on my book recommendations.

Zynga's incredible mistakes

In March 2012,  a student group introduced me to the game developer Zynga. They presented some problems with the company's strategy. After the group presented their report, the share price went down 76%. At one point the company was down 87% from its all time high (basically valuing the company for its cash). Today the share price is up 52% from its all time low.

This note describes the strategy of Zynga one year ago and shows the importance of getting your strategy right. Rarely has a quoted company showed such disregard for strategy.

Business unit strategy. Zynga's business-unit strategy is as follows: Social games played on the Facebook platform. The gameplay involves competing with the player's friends, typically by building something in virtual space. Most of the games are using the same format, but vary in their details. The games are free to play, but the company sells points (Zynga dollars) to its users if they want to get ahead in the game. 94% of revenue is coming from customers and the reliance on advertising is minimal. Typically, a player would get ahead in the game by spending many hours with the game, but by buying points the player does not need to spend hours playing the game. The player will beat his friends without putting in the effort! Less than 5% of users are converted to customers. 

Will Blackberry come back?

What is to make of Blackberry's current strategy? Its share price went like a rocket from 2003 to 2007 (up 5,300%) and like a meteor from 2008 to 2012 (down 96% from peak to bottom). During the last couple of months it is up more than 100%.

The rise and fall has been well documented. A user-friendly smartphone that made messaging/push email very easy and cheap that was left in the backwaters by Apple and Google, which developed smartphones with an array of applications, not just messaging. This blog post will attempt to provide a forward looking view of the company.

Mobile phone market. The mobile phone market is currently being transformed by the smartphone. In 2007 the smartphone represented 11% of shipments and in the beginning of 2012 37% of shipments (data from www.asymco.com). The migration is occurring at a faster rate and, naturally, constitutes a great opportunity for gaining market share. Theoretically (but unlikely in practice), all smartphone platforms can gain market share in the mobile phone market.

Does Dell have a sound strategy?

A consortium headed my Michael Dell is trying to take Dell private. Before the recent surge in share price the company was down 64% (under-performing index with 57%) since Michael Dell took over as CEO in February 2007. Taking the recent bid from the consortium into account, the company is down 44% (under-performing index with 49%). A cynic would argue that Michael Dell ran the company into the ground, just to be able to buy it back at a cheaper price.

Corporate strategy. Dell has tried to develop its corporate strategy in the direction of becoming an information technology services company; gradually moving away from its focus on selling personal computers. However, to succeed Dell has to get each business unit strategy right. Dell's segment reporting is focused on customer groups and not products so it is not so easy to assess the quality of its business strategies.

First posting

I intend this blog to be a commentary on issues relating to business strategy. This being the first time I have started a blog, please do not expect much in the first month.

The name of the blog is Swedish for business strategy. However, the blog will be written in English.