Strategy I Business Strategy Basics
These are our course subjects. With information growing by the second, we can't possibly learn it all, but we can learn how to broad as you develop through the knowledge. This course has been designed to do just that. Our first subject and today's lesson will be in strategy. In this lesson in strategy, we will learn business intrinsics, business extrinsics and some personal mastery. We start our with Business Intrinsics. Let's align our understanding. I mean what is business and why do we
pursue it? The authors at the Miriam Webster Dictionary have 10 variations of their definition of business. From them the most appoint is that business is a commercial mercantile industrial enterprise engaged in as a means of livelihood. All business initiatives are divided into three types. They can sell products or services
or a combination of products and services. This is Jack. Since Jack was a young boy, he dreamed of selling ice cream. Recently, he took steps to pursue this dream and started a business called Fun Combs. We will use Jack's business to deepen our understanding of key concepts and learn about the world of business. So let's apply what we've just learnt
about business initiatives. Jack entered the world deciding he was going to sell a product. He met his ice creams and sprinkles using an old family recipe. Now, if Jack converted this proprietary know-how component of his recipe into a marketable offering, he could sell this processed know-how together with his ingredients to other small and similar businesses. He would then say Jack sells products and services and is therefore a hybrid business. If Jack
retired and worked on a motivational speaking circuit, that's teaching how to be entrepreneurs, we would say that he was engaging in the service business. Great. Easy as pie. Let's quickly do a round of navigation. Today's lesson will concentrate on intrinsics being the purpose of business strategy, the strategic plan, the seven most popular types of legal entities and the three types of initiatives. Then business extrinsics will concentrate on how to use the porters five forces model to appraise the external competitive that businesses face. And lastly we will look at our personal mastery and design our own elevator pitch. Shall we continue? Let's go for it.
There are many forms of legal business entities. But in this course we will spend time learning the top seven. These legal business types surround us everyday. So next time you are out in a city, choose five businesses you see around you and categorise them using the business types we are about to learn. Don't forget post them on your favourite social site with the caption #straw MMBA the seven popular business types we will learn today are the sole proprietor the partnership private corporation the public corporation a not for profit corporation the multinational and the franchise since Jack is the only owner of Funkones we describe the business as being owned by his sole proprietor when Jack his business, he had limited capital to buy equipment. It was really difficult to raise funds. So Jack had to take up a
mortgage of his own home. This legal business vehicle allows you to start your business fairly quickly. Jack will receive all the profits of the business but with that all of the liabilities as well. Jack will be taxed on the combined income of his business as well as that of himself. This vehicle does not give you any protection if things go wrong.
So at Funcom's fails as a business, Jack will need to sell his personal assets to satisfy the legal demands of the Fun Cohn's creditors. Also, if something happened to Jack, his business would cease to exist. If Jack had had the necessary finance to start a business, he could have chosen the private corporation model. Do you know why that would have been a better vehicle? Let's find out, shall we? Privately owned companies range from small companies to giant firms. All of which their shares owned by Select View. This means that
their shares are not publicly traded on a stock exchange. According to the Forbes list, Cargill who sells agricultural products is the largest privately owned company in the United States of America. Cargill employs over 155, 000 employees and generates annual revenues in excess of $114 billion dollars Did you know the company that makes our beloved Mars Bars and Twix Chocolates is also a private corporation? So to answer the Funkones Challenge, if Funkones chose this vehicle and something went wrong, Funkones will be recognised as a separate independent legal entity who is unable to pay its predators. The Funkones predators will have no right to claim the moneys directly from Jack. This makes a a better business vehicle in the wrong
run. Although it does carry some set up costs in the shorter term. The third legal vehicle is the partnership. A partnership is a formal agreement between 2 or more parties who share the profit and liability as per the divisions agreed in their contractual arrangements.
Famous partnerships for History have given us the aeroplane, Microsoft, Netflix and Facebook. Whilst partnerships are because they increase the value of the business through additional capital, knowledge and expertise, they also have a few drawbacks. Shield decision making and reaching consensus adds a layer of complexity to the business. Partnerships in their general form do not really provide personal legal protection or limited liability so they're equally if not more risky than sole proprietorships. The world's
full of opportunities. But we all know that opportunities come with a cost. Public listing business on the stock exchange helps to raise capital and expand and scale a business quickly. On fourth legal vehicle, the public corporation is an expensive one and particularly difficult due to the ownerous administrative and reporting requirements. However, if you have a great product or service, it's the best vehicle to use and anyone can own a piece of the company if they can afford to buy its shares. Similar to a private
corporation, it's recognised as a separate legal entity and offers protection or limited liability to the owners of its stocks and shares. Amazon is a perfect example of a publicly listed and traded business. Amazon first listed on the Nasdaq in 1997 at $18 per share. It trades at a significantly higher price today. And that's why Jaff
Bezos its CEO is recognised as the world's wealthiest person. It has been disclosed that if he liquidated his stockholdings at Amazon today he would have over $10 billion dollars in cash. On the other side of the spectrum are the not for profit companies. They are businesses which have been granted a special tax dispensation because they further either social or environmental goal and so doing provide a public benefit. These types also include social advocacy organisations, trade organizations and foundations. A great example of this fifth vehicle vehicle is the Gates Foundation whose main purpose it is to further primary healthcare and education in developing countries across the world. You are no stranger to multinationals, our sixth
business vehicle, which are large corporations which span several countries across the globe. You will recognise sixth level form when you think of Nestle, Pepsi, PNG and then Unilever Cook or FedEx. And lastly the franchise. This is a business where the owner usually called a franchisee wishes to extend the reach of his products and services. He
grants a license for the use of the trademark and business system branding and expertise to another person called a franchisee. Does this in exchange for a fee called a royalty. Most brand well-known fast food companies follow this model. Your local KFC or Domino's Peter are an example of this. We now know the types, advantages and disadvantages of the legal business entity. Let's cut down to brass tax. The primary target of business is to remain in business. A
business needs to stabilise itself before it can think of profits or growth. Consequently as a leader, you need to fully understand the extrinsics which have bearing. So that you can make proper plans to survive and thrive. Internal and external forces can disrupt your best played plans. And need to be constantly and consistently monitored. So one of the first models we learn in Strategy is the Porters by forces model. Michael Porter, a Harvard University professor,
designed this model in 1979. Many things in business have changed since and many more models have been developed and designed. However, the primary target remaining in business is still the constant. So this model creates a framework for
understanding the context of a business. Close your eyes and imagine that you're sitting at a table in a boardroom discussing the purchase of a new business. Alternatively, consider starting your own business. Do you know the questions to ask and what to consider? Using the quarter's five forces model, you can do a quick mental test of the competitive threats and determine whether the business you are considering is attractive enough to invest in. This is before you even start the necessary quantitative assessments. Let's look at each of these pillars that make up the model. Starting with threats of potential and new
entrance. First, you need to assess the attractiveness of any investment by analysing the effect of new entrance. One of the markers of attractiveness of a business are the barriers to entry. These barriers are those external forces which make it easy to start a competitive business. The invest ideal is to find a business with high barriers to entry and low exit barriers. High barriers restrict entry. We will now explore six forms of these barriers in greater detail. These are economies of scale, capital investment, the
network effect, high switching costs, brand loyalty and distribution channels. Remember Jack and his Funko store? Let's look at E of entry from a Funkon's perspective. This is Jack's friend Charlie. Charlie owns Auto Joe, a car service store. Charlie is also a lover of sugary desserts and has
dreamed of owning an ice cream store. His daughters were thrilled when he announced his indemption to start an ice cream store called Dream Station. A few blocks away from Funkons. Why should Jack be concerned? The threat of new entrance is the ease at which the new entrance, Dream Station can get up and running to compete with FunCones. Let's analyse the Dream Station threat. Firstly and directly
Charlie's store is close enough to attract Jack's customers. Less customers and loss of market share means that FunCones will experience pressure to maintain its profitability and remain in business. Secondly, indirectly, Charlie can leverage aspects of his successful auto gym business like cash favourable credit terms, loans, business expertise and even tactical marketing. The effect will be a cannibalisation of the FunCon share of the local ice cream market. Jack will need to increase his investment and deploy various tactics just to sustain his business and retain his customers. Our first barrier, economies of scale can be demonstrated with these examples. Unilever able to
procure large volumes of sugar to mix its ice creams. The volume discount it receives from its sugar manufacturer allows it to produce ice cream at a significantly lower cost compared to pine cones. Similarly, Walmart also buys in bulk and transfer some of its discounts to its customers. Walmart is able to sell its laundry detergent at a reduced cost. This attracts more customers to its store. Do you
think that still proprietor could open a store directly opposite Walmart and be successful? If you say no, you fully understand colonies of scale. In a nutshell, it is the ability to leverage efficiency advantages and benefits due to the comparative size of business operation. Essentially it lowers the unit cost of the item and increases the competitiveness between similar competitors. Our second barrier
to in is capital investment requirements. In business, manufacturing equipment is purchased with loans that have long repayment periods. The cost of this equipment is recouped over time and once these loans are repaid, the unit cost of products are significantly reduced. To
start, a new manufacturer will need to buy and from this equipment, making his unit cost so much higher than existing manufacturing competitors who've had their equipment paid off by this time The third barrier to consider is the network effect, which is also known as the demand side of the economies of scale theory. How successful would the telephone be, if they were only one of its kind in the world. Now that's a good way to remember the network effect. It's where
goods increase in value because more people use it. So the more telephones grew to become the most efficient means of communication, the more people bought them. Social media applications like WhatsApp or WeChat work best when all of your friends are using it to communicate. So too do the
business applications like Microsoft or Apple gain relevance as more people use them. It's so much easier to share documents when everyone is on the same operating system, right? High switching costs are the fourth type barrier to entry. Retailers and telephony companies are experts at this mechanism. Most retailers have a customer loyalty card which gives you various types of benefits including store discounts. However, this also encourages you to shop at their store to continue to enjoy these benefits. Telephone companies make it difficult for you to switch to competitors by charging penalties and exit fees. There's also the equipment or handset costs to
to consider. For landlines, the reinstallation of equipment and startup comes at a cost and therefore all of the things encourage the status quo behaviour. Brand loyalty, our fifth example is self explanatory. And best described using beverages. Quick quiz. Are you a Coke or a Pepsi person? Most people are either Coke or Pepsi people. And I've actually never met anyone who's professed love for both. But
the most important question is would you switch to the other brand if I paid you to or made the other a cheaper alternative? Chances are Probably not. This is a classic example of brand loyalty. Customers consistently and repetitively buy the same brand. Support the same company as opposed to that of a competitor. Product or company. So if DreamStation issued loyalty cards which gave patrons a free ice cream for every 10th. ice cream board, where do you think you would most frequently buy your cospones? Loyalty cards an excellent way to encourage brand loyalty. But more these tactics in our exciting world
of marketing in the lesson after this one. Lastly we have distribution channels. Let's look at a real business case study here. Telcom South Africa is a company which has enjoyed a monopoly for the last two decades. Its products included telephone landlines, internet connections and data services.
Telcom listed at a dollar75 cents per share in 2003 and grew to over $10 per share in just three years. In two thousand seven, a competitor, Neotel entered the market. And the rest, as they say, is history. By 2020, Techn shares traded around $1. 63 cents per share, which is a significant erosion of almost $9 per share. Let's make this little clearer. If you invested in 100 shares, in 2003, you would have spent $175. This value would have grown to a, thousand andfifth
$6 by 2006, but due to new market entrance with their own distribution channels and networks the publicly traded share is now only worth a dollar and some change and continues to decline. If you had this hindsight during the business boom phase, would you still invest in this company or by this company today, not if you applied, reporters by forces monitor says it, don't you think? So let's quickly summarise the threat of new entrance. New entrance to a market can threaten a business in that they can harness economies of scale, brand loyalty and cumulative expertise. Defences to these new entrance could be barriers to entry such as high switching costs, capital and equipment investment requirements, brand equity, customer loyalty and existing restricted distribution channels. Let's
analyse our next force in the Fire Forces model and let's explore threat substitutes. A substitute is any product or service that can replace another product or service. A substitute product can have a negative impact on both market share and earnings. In economic terms, a substitute effect means that the demand for product A will diminish as the demand for product B increases. Suppliers and our next force
are businesses who provide goods and service inputs required to manufacture your product. For cones, this could be Jack's sugar supplier, the labour agency who provides his cleaning staff and the IT technician who maintains his online accounting system. Where the input is a specialised unique item or there are only a few suppliers, they could charge Jack prices which are excessively high. As there are
no alternative suppliers. Supplier powers recognised as a significant competitive influence. It affects the price of business products and its market competitiveness. John's competitiveness can be affected by his customers. This is known
as the market of outputs. Would you pay $50 for an ice cream? What if this ice cream was made of the best ingredients on the planet? Would you pay more if it was a luxury brand of ice cream? If there are many ice cream shops in a district, a customer can become price sensitive and local prices will be affected. Why should they pay a more if all shops are charging 99 cents for the same ice cream form and the fact that it's Jack's grandmother's recipe is rather irrelevant. Customers have bargaining leverage and can easily switch between offerings with so much information readily available, buyers can explore different offerings online. So similarly, customers or buyer power is influenced by the number of customers, their price centre activity, their ability to substitute to alternative service providers and the availability of information. The last force in our model is
rivalry. In business, rivalry is usually assessed by looking at the number of competitors in an area. You will look at how concentrated the market is and whether the market is growing. Then you will consider the diversity of these rivals. What are their similarities? What are the differences in their comparative offerings? What is certain competitors offer as their enhanced value proposition. You will also
consider the quality difference between the available products. Again, switching costs play a significant role in competitor rivalry. The porters model is also explained in the summary notes of this course in greater detail. Ah, we have completed our five forces model and it's time for a break. Let's look into our crystal ball and see what's coming up next in strategy. To build your comps you will be introduced to the following models to strengthen world's strategic muscles. The
Swat and Pestal Analysis, the business model canvas, McKenzie's 7 S model and the BCG Strategy Palette. At the end of this journey and strategy, you will know how to apply the top models used by business and business consultants. These will equip you with insight and confidence to complete business assessments that are you are confronted with as your career progress Such exciting stuff coming up. Back to business intrinsics and back to our course. Time to turn inwards again. And look how businesses plan to succeed in these competitive environments. Would
it not be great to just choose or to sell all types of products and expand in all directions at once to ensure business viability and success? Well, even Amazon does not sell cars. With unlimited resources, it's quite possible to make and sell anything. Unfortunately, the business reality is that there are limited financial resources. So business leaders need to carefully assess where to play and how to play. They need to invest wisely to make the right bets so to speak and grow and sustain the business. The wrong best bets cost the
business money, allow even mediocre competitors to win and drain business profits. A business needs to have a written plan which details what it wants to achieve and how it will achieve it. The business terminology for this plan is the business strategy. It is a realistic plan of how the
business will secure success. How does a company design the right strategic plan? Well the fault leaders at the Harvest Business Review and the Boston Consulting Group took stock of all the strategy models developed and confirmed that there were over 100 ways to design a strategic plan. BCG and HBR have documented 80 of the best models since the 1960s. They have been used by business leaders to find the best way to keep businesses alive and grow ahead of their competitors. This expansive clearly demonstrates that there's no single way to approach the design of a strategy the design of the strategic plan is iterative and the most common steps can be found in the graphic we're about to learn. Firstly an environmental analysis scan is completed using business models. These document the
current position of the business or the what. The next step is to build on the current position using organisational anchors and pin what the desired the business needs to be. The desired state uses the now to plot the future where we want to be. Leaders document the vision and draft the mission which explains how the strategic vision will be achieved. Values are drafted thereafter. Values are the
acceptable standards of behaviour for the business. Businesses cannot make profits at the expense of other stakeholders. So it's really important that a business documents what is acceptable behaviour and what is not. But more on values will be explored during our leadership and ethics lesson in module four. Now once these organisational anchors are settled, it's time to embed the plan. This is the how we will get their phase and and employees are the most important players in the game of strategy as they complete the work and fulfil the vision and mission of the company.
This step lets each staff member know what their role in the achievement of the strategic plan. So the strategy is translated into business unit goals, department goals, functional goals with KPI's objectives and individual targets. The next step is that the business will deliver against these goals. Then it will take stock of its delivery
through tracking and reporting. Critical decision making at this point would be which projects to continue to invest in, which projects to recalibrate or tweak to tee up success and which projects to abandon. The strategic plan runs in cycles. These cycles coincide with the businesses financial reporting periods. The drop of strategy never ends. Because the competitive and technological environment
is dynamic. It's constantly changing. Therefore, you will always see strategy in a cycle form. It starts all over again once you reach the end. Now depending on your industry,
your porters, your SWAT and your pestal analysis will also be a summary of the level of dynamism that industry is experiencing. Typical strategic plans look like these graphical examples. All strategic plans differ because all businesses are different. And they are similar in that they contain the key elements. A vision, a mission, values, goals and
objectives. Most businesses design their plan in three time frames. Immediately is like 90 days from now. Short term which is a one to two year period and long term which is a three to five year period. However, due to changes in technology, both disruptive and innovative, most businesses today try not to plan longer than four to five years. The exception being capital in terms of businesses. They need to plan for a longer
term or period because the nature of the payback period linked to their capital equipment investment is longer. Examples of could be mineral resource companies. They just have a different approach to the strategic plan. There are many great examples of strategic plans on the internet and I invite you to look at their components as well. Find a great one and remember to post it at #sure MMBA on your favourite social platform so that your classmates can learn from your examples and you from theirs. Remember to look for similarities as well as specific nuances to build your business knowledge in the industries that interest you.
Alternatively, you can take a stab at creating a high level strategic plan for the Fun Colds company. And now for some personal growth. The elevator pitch is an important tool to any aspiring business leader working to get ahead in a career game. It's an advertising commercial all about you. It describes who you are, what problem you've identified to solve and so doing highlights your benefit to an audience. It is used for those moments when opportunities present itself and you need to sell yourself fast. The three fundamental rules for an elevator pitch are
that it can never be longer than 30 seconds, that being the time it takes to ride an elevator from the top of the building to the ground floor. Number two, it should consist of no more than 90 words and number three, that it should be practiced so that it could be delivered with perfection. Now that you know the shape, let's explore the The elevator pitch is usually not longer than 80 to 90 words. The first 20 words
are the introductory part of your pitch and you usually introduce yourself, your background and your skills. The next 20 words speaks to the relevant problem you've identified because of the background you have. It's important not to add any statistics or numbers because these have a tendency to confuse. So keep it simple and easy to understand. The next P is the crux. It's the most
important part of your speech. You need to engage your listener by explaining how your background and your solution can be of benefit or an advantage to them in some way. Then closure, which is the call to action part. Here you specify what you need from them and you close this introduction with a memorable hook like a quote or newspaper blurb and a warm smile. Let's complete a quick example. Hello, I'm Sunny. I'm studying behavioural economics in New York. I've seen the power of a focused behavioural economics approach at QuickSave where I worked during my college vacations.
Sales of those products grew in double digits. In studying your company, I'm drawn to your culture of constant innovation and believe behavioural economics can make a difference to your product sales. Herb Brooke said, risk something or forever sit with it in your dreams. So please keep in mind when you next think of employing a behavioural economics intern. A wise man once said knowledge is having
the right answers. That intelligence is asking the right questions. I do hope that you continue to pursue strengthening your mind with me on this course. And I look forward to meeting again in lesson two where we enter the exciting world of marketing. Goodbye.