Week 9

Competitive positioning

Assumes rational choices & optimising behaviour

Ignores internal conficts of interest

Assumes an oligopolistic market

Strategy is about obtaining competitive advantage

What Kind of Industry Has the 'Right' Attributes According to Five Forces?

Answer: Industries where all five forces are WEAK (favourable to incumbents)

The "Right" Attributes (Attractive Industry):

1. HIGH barriers to entry

• Difficult for new competitors to enter

• Protects existing firms

2. LOW bargaining power of suppliers

• Many suppliers, commodity inputs

• Firms can negotiate low costs

3. LOW bargaining power of buyers

• Fragmented customers, no monopsony

• Firms can maintain prices/margins

4. LOW threat of substitutes

• No alternative products/services

• Customers must use industry's products

5. LOW rivalry among competitors

• Few competitors, differentiated products

• No price wars, stable market shares

Result: High industry profitability for all firms

Real-World Examples:

Pharmaceuticals (historically attractive):

• ✓ High entry barriers (patents, R&D costs, FDA approval)

• ✓ Weak supplier power (commodity chemicals)

• ✓ Weak buyer power (patients/doctors prescribe, insurance pays)

• ✓ Low substitutes (patented drugs)

• ✓ Low rivalry (patent protection, differentiated products)

Software platforms (e.g., Microsoft Office in 1990s-2000s):

• ✓ High entry barriers (network effects, switching costs)

• ✓ Low supplier power

• ✓ Weak buyer power (compatibility requirements)

• ✓ Low substitutes (industry standard)

• ✓ Low rivalry (dominant market position)

Contrast: "Wrong" Attributes (Unattractive Industry):

Airlines:

• ✗ Low entry barriers (can lease planes)

• ✗ High supplier power (Boeing/Airbus duopoly)

• ✗ High buyer power (price-sensitive customers)

• ✗ Substitutes exist (trains, cars, video conferencing)

• ✗ Intense rivalry (many competitors, price wars)

Result: Chronically low profitability

Bottom Line: According to Porter, industries with monopolistic/oligopolistic characteristics and strong barriers protecting incumbents have the "right" attributes = high profits for firms in that industry.

Both the RBV and Process perspectives arose in reaction to the perceived weaknessess of the classical school

Criticisms:

1. Fallacies of prediction, detachment and formalisation (Mintzberg, 1994)

Source: Mintzberg (1994) "The Fall and Rise of Strategic Planning," Harvard Business Review, Jan-Feb 1994

The Three Fallacies:

1. Fallacy of Prediction/Predetermination

Classical School assumes: Strategy formation is a controlled, conscious process of thought (rational economic man can predict and plan the future)

The fallacy:

• The future is unpredictable - markets, technology, competitors change unexpectedly

• Can't have perfect information - too much complexity and uncertainty

• Analysis can't replace intuition/creativity - strategy requires judgment, not just data

• Emergent opportunities can't be predicted in advance

Example: Who predicted the internet would transform retail? Strategic plans from 1990 couldn't foresee Amazon.

2. Fallacy of Detachment

Classical School assumes: Responsibility for strategy must rest with the CEO/top management (strategists separate from implementers)

The fallacy:

• Separates thinkers from doers - those who plan don't understand operational reality

• Strategists lack implementation knowledge - detached from day-to-day realities

• Knowledge exists throughout organisation - not just at the top

• Front-line workers often see opportunities and problems executives miss

• Strategy needs tacit knowledge that planners don't have

Example: Honda's US success came from salespeople/engineers on the ground, not Tokyo HQ planners.

3. Fallacy of Formalisation

Classical School assumes: Implementation is a distinct phase that comes after formulation (thinking separate from doing)

The fallacy:

• Strategy and action can't be separated - you learn by doing

• Rigid plans become obsolete quickly in dynamic environments

• Over-formalised planning kills flexibility - bureaucratic process stifles creativity

• Implementation reveals new information that should change strategy

• Formulation and implementation must be iterative - constant feedback loop

Example: Amazon didn't plan AWS in 1995 - it emerged from building internal infrastructure, then realizing others would pay for it.

How These Connect to the Three Premises:

The Core Message:

Classical planning assumes:

• Perfect prediction

• Detached strategic thinking

• Formal separation of planning and execution

Mintzberg shows:

• Strategy emerges through learning

• Knowledge distributed throughout organisation

• Planning and action must be integrated

"Not wrong - but partial!" - Deliberate planning has a role, but Classical School overestimates it and ignores emergent reality.

Use for: Process School critique of Classical School; Links to emergent strategy and Mintzberg's contribution

Underplays firm heterogeneity and the role of internal factors in strategy.

-Intra-industry differences in profits are greater than inter-industry differences in profits (e.g. Hansen & Wernerfelt, 1989; Rumelt, 1991)

-Rumelt (1991) one of first contributors to body of academic literature on RBV

In other words, being in the right industry does matter, but being good at what you do matters a lot more, whatever industry you are in!

NOTES:

Hansen and Wernerfelt (1989) Determinants of firm performance: The relative importance of economic and organizational factors: organizational factors explain about twice as much variance in profit rates as economic factors.

Rumelt, 1991. How much does industry matter?. Strategic management journal, 12(3), pp.167-185.

Here Rumelt used government statistics to examine the performance of manufacturing firms for the years 74 – 79.

Rumelt’s study showed that neither industry nor corporate ownership can explain the lion’s share of the differences in profitability among business units. Being in the right industry does matter, but being good at what you do matters a lot more, no matter what industry you’re in. This study was one of the first entries in what has since become a large body of academic literature on the resource-based view of strategy.

The airline industry is notoriously unprofitable

“In the first hundred years of the US air travel (1903-2003), the entire industry made exactly zero cumulative profit.”

The Financial Times, November 22, 2003

Precursor:

Penrose (1959) The Theory of the Growth of the Firm

Key publications:

Wernerfelt (1984) A Resource-Based View of the Firm

Prahalad and Hamel (1990) The core competence of the corporation

Barney (1991) Firm Resources and Sustained Competitive Advantage

NOTES:

Edith Penrose was an American economist who worked in the UK for most of her career, at LSE for a short period, and then at SOAS up the road, where she became an expert in Asian economies.

She was the first to speak of firms as “bundles of resources”. She argued that firms could create value through innovative use of the resources they controlled.

It was not until the 1980s that her ideas were picked up by strategic management scholars. In particular, it was Wernerfelt who wrote an influential paper which coined the term RBV.

Barney key paper that sets out strategy from a view of bundle of resources

The Netflix Culture: An organisation designed to promote flexibility, employee freedom and innovation v error prevention and rule adherence

The infamous Netflix Culture Deck, is set of 127 slides, originally intended for internal use, but that have been widely shared. Sheryl Sandberg, COO of Facebook, reportedly said that the slides “may be the most important document ever to come out of Silicon Valley”.

(Or “hypermasculine, excessively confrontational and downright aggressive” Erin Mayer)

link to slides: https://www.slideshare.net/reed2001/culture-2009

See also: https://jobs.netflix.com/culture

From No Rules Rules

The generic point: If we wanted to explain the success of Netflix, or Apple or any other outstandingly successful company would it be sufficient to look at the streaming industry, or the mobile phone industry and come up with the conclusion that they were clever in pursuing a differentiation strategy that allowed them to capture market share away from other players in the industry, such as Disney or Nokia? Or is there something else? Something about Netflix or Apple itself, rather than about the way it positioned itself in the industry.

This is the question that RBV helps us answer.

NOTES:

Key ideas:1. Build up talent density (lean workforce, creatives paid top of market, no pfp, the keeper test – how would you as a manager react if someone told you they will leave the company)

Poor performance is contagious

2.Increase candour (radical frank feedback – the 4 As (Actionable, Aim to assist, Accept or Discard, Acknowledge))

3.Reduce controls (lead with context not rules)

Metaphor: They are not a family, they are a (professional) team

“Effort is not enough. If you are putting in a B performance, despite an A for effort, then you will be thanked respectfully and replaced.”

Porter’s perspective looks at cost positions, products, brand features, and market share. The RBV looks at business processes, skill sets, innovation, and organisational culture. The unit of analysis changed from the industry/ market to firm specific assets.

The generic point: If we wanted to explain the success of Netflix, or Apple or any other outstandingly successful company would it be sufficient to look at the streaming industry, or the mobile phone industry and come up with the conclusion that they were clever in pursuing a differentiation strategy that allowed them to capture market share away from other players in the industry, such as Disney or Nokia? Or is there something else? Something about Netflix or Apple itself, rather than about the way it positioned itself in the industry.

This is the question that RBV helps us answer.

NOTES:

Porters Position

RBV: All about the internal capabilities of the firm

-> Two views on how to build a competitive advantage

Rumelt: The RBV on one level looks really obvious. You have to have good resources in order to be successful. But it is really a theory about what’s the locus of success – where does success come from?

1. Resource heterogeneity

   -Different firms possess different bundles of resoureces and capabilities

2. Resource immobility

   -Resource differences between firms can be long-lasting (resources are “sticky”)

3. Path dependence

   -History matters to the accumulation of resources

NOTES:

This is taken from Barney (1991 I presume)

Resource heterogeneity: The first assumption is that skills, capabilities and other resources that organizations possess differ from one company to another. If organizations had the same amount and mix of resources, they could not employ different strategies to outcompete each other. What one company would do, the other could simply follow and no competitive advantage could be achieved. This is the scenario of perfect competition, yet real world markets are far from perfectly competitive and some companies, which are exposed to the same external and competitive forces (same external conditions), are able to implement different strategies and outperform each other. 

Resource immobility: The second assumption of RBV is that resources are not mobile and do not move from company to company, at least in short-run. Due to this immobility, companies cannot replicate rivals’ resources and implement the same strategies. Intangible resources, such as brand equity, processes, knowledge or intellectual property are usually immobile.

Path dependence: In other words, history matters.

“The physical things a firm buys, leases, or produces for its own use, and the people hired on terms that make them effectively part of the firm” (Penrose, 1959)

“Those tangible and intangible assets which are tied semi permanently to the firm” (Wernerfelt, 1984:172)

“The tangible and intangible assets that a firm controls that it can use to conceive and implement its strategies” (Barney & Hesterly, 2010:66)

Financial

e.g. cash, equity, loans, retained earnings…

Physical

e.g. plant, equipment, location, access to raw materials…

Human capital

e.g. training, experience, judgement, intelligence and wisdom of individuals associated with a firm…

Organisational capital

e.g. formal systems such as reporting structure, explicit management systems, compensation systems. As well as informal systems such as culture, trust, reputation…

Notes:

Barney (1991) defines resources as “all assets, capabilities, organisational processes, firm attributes, information, knowledge etc. controlled by a firm that enables the firm to conceive of and implement strategies that improve its efficiency” (p.101). He groups these into three categories:

Physical

Human capital resources: this included all the training, experience, judgement, intelligence, insight etc. of individual managers

Organisational capital resources: This includes both the formal structures of an organising, for example its reporting structure of pay system as well as informal aspects such as the informal relationships among groups. For example: A really good sales force.

Sustained competitive advantage is determined by:

Notes:

Organisation: components of a firm’s organisation, often called complementary resources and capabilities, such as formal reporting structure, management control systems, informal management controls, compensation policies…

Note: Barney, in his 1991 article, introduced VRIN (valuable, rare, inimitable, and non-substitutable).

Subsequently Barney (1995) updated the VRIN model to VRIO (valuable, rare, inimitable, and organised to exploit), in which he combined the concepts of inimitability and substitutability, and added the capacity to exploit resources (O).

1. Unique Historical Conditions

Rivals cannot replicate the historical sequence of events that led to acquisition of resource

E.g. early-mover advantage, path dependence, network effects

1. Causal ambiguity

Rivals cannot observe or reverse-engineer the resource

Social complexity (e.g. culture), system complexity (e.g. interrelated capabilities)

1. Time Compression Diseconomies

Resource is inherently time-consuming to accumulate

E.g. reputation, knowledge, commercial and social relationships, tacit knowledge and skills from experience

Notes:

A resource can be imitated in at least two ways: duplication and substitution

Rumelt describes this perhaps more intuitively than Barney (although he is making the same point):

For an advantage to be sustained your competitors must not be able to duplicate it. You must possess what he calls an ‘isolating mechanism” such as a patent giving its holder the legally enforceable right to monopolise the use of a technology for a time. Other examples include reputations, commercial and social relationships, network effects (where the value of a product increases as the number of buyers or users gets larger. It is like an economy of scale but instead of reducing the producer’s cost, it increases the buyer’s willingness to pay.)

NOTES:

Obviously if you have a monopoly / government / patent

-> But there are softer versions of this (Listed on the slide)

“The collective learning in the organisation, especially how to co-ordinate diverse production skills and integrate multiple streams of technologies” (1990:81)

Integral to the organisation’s success

Generating fundamental customer or cost benefit

Providing competitive differentiation

Learning-based accumulations of skill and experience

Vested in people

Supported by technology, processes and values

Notes:

They focus on a particular resource – knowledge.

In this article they argue that “The real source of advantage is to be found in management’s ability to consolidate corporatewide technologies and production skills into competencies that empower individual businesses to adapt quickly to changing opportunities”. (p.81)

In other word the real challenge is not external, but internal – you need to work out what you are good at, develop the knowledge that this requires and build on these areas in which you have achieved excellence in order to innovate and respond to change.

They give the example of US car companies that have seen key components (such as an engine) as something to be outsourced if it can be done more cheaply. In contrast Honda was reluctant to outsource responsibility of such a key part of a car’s function to others and made an enormous commitment to Formula One.

Another example might be Ocado – and online groceries delivery company. They struggled to make money delivering groceries. But have more recently turned the business around by leveraging their core competence – their knowledge gained through their UK retail experience to develop their “solutions” business, which sells the logistics platform to supermarkets, including Kroger in the US and Casino in France. https://www.ft.com/content/fdef8e4a-3b45-11e9-b856-5404d3811663

Provides a valuable ‘inside-out’ perspective that complements industry analysis. BUT:

1. Elemental fallacy: despite the RBV’s central perspective being internal, what defines value is the market.

2. Conceptually vague (exactly what are valuable resources)

3. Very difficult to test empirically and thus to falsify

4. Not well suited to prescription and thus to insights for practitioners

5. Questionable utility to new firms and highly dynamic environments

Which leads us to our next topic…..Dynamic Capabilities

(Source: Priem & Butler, 2001)

Notes:

Elemental fallacy: The RBV claims to be all about an internal perspective – but what makes a resource valuable is the product market (i.e. external), so it is more influenced by external factors than it acknowledges.

Priem & Butler argue that the fundamental argument of the RBV “that valuable and rare organisational resources can be a source of competitive advantage” is true by definition. This is because Barney defines a resource as being valuable if it leads to competitive advantage. In essence Barney is saying that resources that generate competitive advantage leads to competitive advantage. As this is an analytic statement (i.e. true by definition) it cannot be tested empirically, and so it not a theory.

NOTES:

It’s about providing a counterpoint to Porter

Extends RBV by:

Examining how VRIO resources can be created and refreshed

Providing a more dynamic and process-oriented approach to firm resources

Key publications

Teece, Pisano and Shuen (1997)

Eisenhardt and Martin (2000)

Notes:

Aimed to extend the RBV

When needing to operate in a dynamic, changing environment

Addresses why some organizations are better able to cope in situations of rapid and unpredictable change.

Dynamic capabilities are the specific processes / routines that an organization has built so that they can reconfigure their resources to adapt to a changing environment.

“the firm’s ability to integrate, build and reconfigure internal and external competence, to address rapidly changing environments” (Teece et al., 1997)

Dynamic capabilities do not have to be firm-idiosyncratic: While RBV emphasises that resources need to be inimitable, DC approach suggests that there are ‘best practices’

(Eisenhardt and Martin, 2000:1106)

Notes:

In other words – how do organisations build in ways to adapt to change?

Dynamic capabilities have more commonalties across firms than is normally assumed from an RBV perspective. In other words, while the RBV normally emphasises that resources need to be inimitable, E&M argue that, in popular parlance, there is ’best practice” in DCs.

Innovation literature: identifies two qualitatively different types of activity: exploitation of old certainties and exploration of new possibilities

1. Exploitation: improving and refining existing products and processes, efficiency, implementation and execution. Returns more predictable and near term.

2. Exploration: looking for new ideas, new ways of doing things, involves search, variation, risk taking, experimentation, flexibility. BUT returns uncertain and long term.

Two types of activity require very different:

-Organisational structures

-Processes/ Capabilities/ Cultures.

Both important, but inherently at odds with each other as they compete for resources and management attention.

O Reilly & Tushman argue organisations tend to be biased towards exploitation – this can be:

1. Explicit: deliberate choice about how org allocated time and resources.

2. Implicit: more subtle aspects or organisational structure, routines, reward policies, culture that favour status quo

Notes:

Ambidexterity – see O’Reilly & Tushman (2004) https://hbr.org/2004/04/the-ambidextrous-organization

All organisations have to deal with the problem of exploring new opportunities, while at the same time diligently exploiting their current ones. How to do this well?

They carried out research into 35 firms that were attempting to launch breakthrough innovations.

Companies tended to structure their breakthrough projects in one of four basic ways:

Seven were carried out within existing functional designs – completely integrated into the regular organisational structure.

Nine were set up as cross functional teams – operating within the established organisation but outside the existing management hierarchy.

Four took the form of unsupported teams – independent units set up outside the established organisation

15 were pursued within ambidextrous organisations – where the breakthrough efforts were organised as structurally independent units, each with its own processes, structures and cultures, but integrated into the existing senior management hierarchy.

They found that ambidextrous organizations were the most successful of the four structures in coming up with breakthrough projects. They were also more successful in terms of their existing business.

Separate out new exploratory units from traditional exploitative ones allowing them to have different processes, structures and cultures.

At the same time maintain tight links across units at a senior executive level.

Key is to have ambidextrous managers – managers who can be sensitive to the needs of different kinds of businesses.

Basic idea is organisational separation with senior team integration.

Rational decision making in organisations as more of a theoretical ideal than an empirical reality:

Herbert Simon (1947)

Cyert and March (1963)

It had two key themes:

1. Rational economic man is a fiction

2. The micro-political nature of the organisation

Notes:

The realisation that rational decision making in organisations is more of a theoretical ideal than an empirical reality can be traced back to Herbert Simon and Cyert and March (1963). A picture emerged that the ideals explained by the content realm (in particular from the classical school) had very little to do with how strategy was actually implemented in reality. Strategy, as a process in reality, was bound up with internal politics, organisational culture and managers were neither completely rational, nor the disinterested advocates of the owners’ interests as some assumed.

Whittington, R. (2001). Chapter 2: Theories of Strategy. In What is Strategy—and Does it Matter? (2nd Edition), London: Thomson International, pp. 9-40.

In practice we are only boundedly rational:

1. We are reluctant to consider more than a handful of factors at a time.

2. We are reluctant to embark on unlimited searches for relevant information.

3. We are biased in our interpretation of data.

4. We are prone to accept the first satisfactory option that presents itself.

Whittington (2001)

1. Firms are rarely united in optimising a single utility (that of the shareholder/ profit).

2. They are coalitions of individuals/ groups, each of whom brings their own objectives.

3. Organisational groups bargain between each other to find a set of joint goals that are more or less acceptable to them all.

4. The bargaining process involves many compromises and what Cyert & March describe as “side payments” in turn for agreement.

5. In sum: Strategy is the product of political compromise not profit maximising calculation.

Notes:

NOTES:

Porter & Economics assume that firms are rational and optimizing shareholder value.

However, firms are coalitions of individuals/groups, each with their own objectives

Both of these together strongly favours strategic conservatism.

Change resisted as it will nearly always set off an internal civil war.

“The organisation’s competitive problems may be much lighter than the obstacles imposed by its own outdated routines, bureaucracy, pools of entrenched interests, lack of cooperation across units, and plain-old bad management” (Rumelt, 2011 p.78)

Sometimes the problem is us!

Do you remember this quote:

“Without some strong intervention all organisations end up being run for the members of the organisation – not the customers, not the shareholders or other stakeholders. This is why an organisation needs strategy” Jacobides

Notes:

“it is quite inappropriate to conceive of firm behaviour in terms of deliberate choice from a broad menu of alternatives that some external observer considers to be ‘available’ opportunities for the organisation. The menu is not broad, but narrow and idiosyncratic; it is built into the firm’s routines, and most of the ‘choosing’ is also accomplished automatically by these routines” (Nelson & Winter, 1982:134)

Which leads us back to Jacobides argument for why organisations need strategy: “Without some strong intervention all organisations end up being run for the members of the organisation – not the customers, not the shareholders or other stakeholders. This is why an organisation needs strategy”

Michael Jacobides – Associate Professor of Strategy and Entrepreneurship at the London Business SchoolNOTES:

Strategic Conservatism: Tendency to not change the strategy.

Term emerged from massive disruption of the dot-com bubble

A definition: “articulates the logic…that demonstrates how a business creates and delivers value to customers…outlines the architecture of revenue, costs and profits associated with delivering that value” (Teece, 2010)

“All it really meant was how you planned to make money” (Michael Lewis)

But the term is not just applied to tech businesses (e.g. Walmart, Southwest Airlines)

Johnson, M.W., Christensen, C.M. and Kagermann, H., 2008. Reinventing your business model. Harvard business review

Notes:

The term emerged from massive disruption of the dotcom boom, as people searched for a high-level statement of how people were going to make money from this huge technological disruption.

The business model of most early internet companies was just to attract huge crowds of people to a website. Many were failures because they overlooked how to generate a new revenue stream.

An example: Pets.com https://www.investopedia.com/ask/answers/08/dotcom-pets-dot-com.asp

It is a statement of the core hypothesis of how a business can be profitable.

But the term business model is not just applied to tech businesses (see Johnson et al. 2008)

Image is of the Nasdaq composite index – a stock market index that is heavily weighted towards companies in the IT industry.NOTES:

Business model approach is about rethinking the fundamental way to make money

New technology is often assumed to transform an industry (voice recognition, ChatGPT)

Kavididas et al. (2006) argue it is just as important to develop a business model that can link a new technology to an emerging market need

A business model is the interface between what technology enables and what the marketplace wants

Kavadias, S., Ladas, K. and Loch, C., 2016. The transformative business model. Harvard business review, 94(10), pp.91-98.

NOTES:

Business model needs to link new technology to a way to make money with it

1. A value proposition: what customer need are you answering

2. A revenue model: how are you going to turn this into a revenue stream

3. A cost model: What are the core assets and capabilities/ supporting network needed for the business to provide its products

Kavadias et al. 2016

Willman (2018)

Notes:

Willman

1. A value proposition: What product or service or bundle of the two are you offering that consumers are prepared to pay for.

2. A revenue model: This focuses on pricing and customer switching costs. Firms may give away technology to consumers in order to secure revenue streams. For example, Microsoft which licenses its operating system in order to be able to sell other products based on it. Teece & Lindgren (2017) offer a less extreme example: Rolls Royce stopped selling aircraft engines and simply charged customers for the ‘hours use’ of the engine, this encouraged increased take up.

3. A cost model: What are the core assets and capabilities and partnership network needed for the business to provide its products. Neither Apple nor Nike own their manufacturing capability, they outsource all production. They focus on ownership of the intellectual property (e.g. design and technology) and customer interface (e.g. brand management). The (generally less profitable) bits in between are outsourced.

Some use the terms interchangeably, but others see the terms as distinct. For Example:

Uber and Lyft adopt same basic business model

But they have different strategies

Whichever camp you are in, it is clear that thinking about one’s business model is very closely related to the fundamental questions asked by strategists. Thinking about your strategy should involve thinking about your business model

In many industries the business model is settled and thus often implicit (and ignored)

Introducing a better business model into an existing market is the definition of a disruptive innovation

Notes:

Uber and Lyft adopt the same type of business model – they are platform business that connect gig workers to consumers, and make use of the unused capacity of private cars. They are not employers but market places. However, they compete, and so develop distinct strategies. So they have the same underlying business model but distinct strategies.

Beauty Pie

Rolls Royce

Inditex

Ghost Restaurants

Notes:

Beauty pie: https://www.ft.com/content/b795365e-4425-11ea-9a2a-98980971c1ff

Describes how serial entrepreneur Marcia Kilgore decided to upend the traditional model in the beauty industry. Consumers were getting used to paying monthly memberships for access to everything from razors (Dollar Shave Club) to music (Spotify) and Netflix. Beauty pie members pay a membership fee which lets them buy – at cost prices – makeup and a growing roster of other related products. By cutting out expensive real estate (stores) and advertising she has turned the traditional model on its head.

Rolls Royce stopped selling aircraft engines and simply charged customers for the ‘hours use’ of the engine, this encouraged increased take up.

Ryan air – turn a cost into a revenue stream (copied business model of SW airlines – without the fun)

Cooking up a new business model during the pandemic | The Economist

This describes the rise of “Ghost” restaurants. Uber Eats say it now has more than 10,000 delivery only restaurants. Large restaurant chains are launching delivery only operations.

How Inditex is refashioning its business model | The Economist

Inditex started the 2000s with fewer than 750 stores growing to around 7500. But in 2020 for the first time in its history it finished the year with fewer shops than it had 12 months earlier (and suffered its first quarterly loss). Up to 1200 outlets are planned to be axed.

Instead, Zara is chasing its clients to where they spend most time – on their phone. They are shifting to online sales, but the business models are very different:

Shops are giant bundles of fixed costs (rent, staff)

Websites and warehouses cost much less but the variable costs are higher (delivery, returns)

Gross margins are a bit lower online v shops (where it is harder to compare prices)

There is the danger that online sales cannibalise the shops – unless you close some shops the business has to cover higher variable costs of online fulfilment while continuing to incur the fixed costs of legacy bricks and mortar.

Up to now its strategy has been to outsource more of its production close to its main European markets which allowed it to respond faster to fashion terns and maintain leaner stock. Operating margins have been a plump 17%.

It aims to raise its share of online sales from 14% in 2019 to at least 25% by 2022.

Inditex also has short leases on its stores which give it more flexibility.

Up to one in three garments sold online are returned [new charging model here]

Zara spends next to nothing on advertising but might have to start if people are not reminded of its existence by walking past its billboard like outlets.

On charging for returns see: https://www.ft.com/content/792c2893-4108-4faf-abf7-128b1aeda6c2

A voice activated virtual assistant

A product in search of a revenue stream…

2018 Amazon had over 10,000 employees working on Alexa and related products

2019 Amazon announced they had sold more than 100 million Alexa enabled products

Just about every plan to monetize Alexa has failed

2022 on pace to lose $10 billion

Rumelt’s definition: “A cohesive response to an important challenge. Unlike a stand-alone decision or a goal, a strategy is a coherent set of analysis, concepts, policies, arguments, and actions that respond to a high-stakes challenge” (p.6)

Standard modern treatment of strategy concentrates on competitive advantages such as scale, scope, network effect reputation etc.

None of which are logically wrong, but this is to ignore two huge and incredibly important natural sources of strength:

1. Having a coherent strategy (in reality very unusual – largely due to internal politics)

2. The creation of new strengths through subtle shifts in viewpoint. (What did Walmart or Starbucks do that was so new?)

Notes:

1. Rumelt argues that in reality it is very unusual for large organisations to adopt coherent coordinated strategies “most complex organisations spread rather than concentrate resources, acting to placate and pay off internal and external interests. Thus, we are surprised when a complex organization, such as Apple or the US Army actually focuses its actions…..good strategy itself is unexpected.” (Rumelt p.19)

2. The second natural advantage of many good strategies comes from looking at things from a fresh or different perspective.

Walmart broke conventional wisdom by putting big stores in small towns. They made the economics of this work by having an integrated network of logistics.

Starbucks did not invent coffee, or coffee shops, but they did invent coffee flavoured milk in a congenial environment.

NOTES:

“Standard modern treatment of strategy concentrates on competitive advantages (PORTER) such as…”

R Rumelt is an academic and a consultant. Hugely respected by both worlds.

From the Economist: Throughout his long career Rumelt published little. But his influence grew slowly, and interest in his ideas was reignited in 2007 by a widely read interview published in McKinsey Quarterly. His most influential thoughts were contained in just two articles published some ten years apart:

In 1982 he demonstrated that there was a statistical link between corporate strategy and profitability, showing that somewhat diversified companies performed better than highly diversified ones.

In 1991 he published a controversial paper (called How much does industry matter?) arguing that neither the ownership of a business nor the industry that it was in could explain the bulk of the difference in profitability between different businesses. Being good at what you do, he maintained, counted for a lot more.

See: https://www.mckinsey.com/business-functions/strategy-and-corporate-finance/our-insights/strategys-strategist-an-interview-with-richard-rumelt

There is no recipe

Theories as intellectual tools

The creation of new strengths through subtle shifts in viewpoint

External: what about the market (last week)

Internal: what about your internal capabilities (RBV)

Process: sometimes it’s just us

Business model: Be explicit (and creative) about your underlying hypothesis of how to make money