Strategic Management

Definitions

1. Threat of New Entrants

— Barriers to entry protect incumbent players: economies of scale, capital intensity, licensing, network effects, brand loyalty.

2. Supplier Power

— Concentrated suppliers, lack of substitutes, high switching costs increase their bargaining power.

3. Buyer Power

— Large, concentrated buyers, standardized product, ease of switching.

4. Threat of Substitutes

— Alternative products from other industries limit price-setting.

5. Intensity of Rivalry

— Number of competitors, industry growth rate, degree of differentiation, exit barriers.

Competitive advantage is the firm’s ability to consistently outperform competitors in performance metrics: profit, return on capital, market share. The key word is “consistently”: temporary superiority (luck, market conditions) is not a competitive advantage in the strategic sense.

Michael Porter identified two sources of competitive advantage: cost leadership (producing cheaper than competitors at comparable quality) and differentiation (creating unique value that buyers are willing to pay more for). A third “strategy” — focus — combines one of the two basic approaches wit...

Competitive advantage is formed within the context of industry structure. The five forces determine the intensity of competition and the potential profitability of an industry:

1. Threat of New Entrants — Barriers to entry protect incumbent players: economies of scale, capital intensity, licensing, network effects, brand loyalty.

Formulas

The value chain is a tool that divides a firm's activities into strategically significant types of activities to understand where value is created and where costs arise.

1. Searching for ways to reduce costs: identify which link contains the main costs; look for opportunities for reduction: automation, outsourcing, optimization, negotiations with suppliers.

2. Searching for ways to differentiate: determine in which link unique value can be created for the customer: premium ingredients (McDonald’s vs Shake Shack), exceptional service (Ritz-Carlton), technological innovation (Tesla OTA-updates).

A company’s value chain is embedded in a broader system: supplier chains, distribution channels, buyer chains. Integration with key links in the system is a source of advantage.

Definitions

Red ocean

— existing industries with tough competition. Players divide a known market; as competition intensifies, profit falls. Companies are forced to choose: value or cost (trade-off).

Blue ocean

— undiscovered market space. It is created, not found. Rules of competition do not yet exist. Value and cost do not contradict each other.

Kim Chan and Renée Mauborgne, in their book “Blue Ocean Strategy” (2005), proposed an alternative to competitive struggle in “red oceans”—industries with established rules of competition where companies fight over the same pie.

Red ocean — existing industries with tough competition. Players divide a known market; as competition intensifies, profit falls. Companies are forced to choose: value or cost (trade-off).

Blue ocean — undiscovered market space. It is created, not found. Rules of competition do not yet exist. Value and cost do not contradict each other.

A tool for creating a blue ocean is the search for a new value curve through four questions:

Traditional business (Pipeline): a company creates value by moving it along a linear chain from suppliers to buyers. Platform: creates infrastructure for interaction between two or more parties who themselves create value.

Examples of platforms: Amazon Marketplace (sellers and buyers), Airbnb (hosts and guests), Uber (drivers and passengers), App Store (developers and users).

Network effect: the value of a product/service increases with the growth in the number of users. This is an extremely powerful competitive advantage mechanism.

Direct (one-sided) network effects: each new user increases value for all others. The telephone, messenger, Facebook—their value depends on how many of your contacts are present.

Definitions

Potential competitors

— new entrants and substitutes. Three sources: (1) companies for whom entry only requires minor changes (Amazon entered the cloud market); (2) companies with similar competencies; (3) technology startups targeting your industry.

Competitive analysis is the systematic study of competitors to forecast their behavior and develop one’s own strategy. It answers the questions: who are our competitors? What are their capabilities and vulnerabilities? How will they react to our actions?

Direct competitors offer a similar product to the same segment. BMW vs Mercedes.

Indirect competitors satisfy the same need in a different way. Train vs airplane for the Moscow–Saint Petersburg route.

Potential competitors — new entrants and substitutes. Three sources: (1) companies for whom entry only requires minor changes (Amazon entered the cloud market); (2) companies with similar competencies; (3) technology startups targeting your industry.

Definitions

1. Customer Segments (CS)

— for whom are you creating value? Mass market, niche, segmented, multi-sided (platform)?

2. Value Propositions (VP)

— what value do you create for each segment? Novelty, performance, customization, design, brand, price, risk reduction, convenience.

3. Channels (CH)

— how do you deliver the value proposition? Direct (own website, stores) vs partner (distributors, retailers).

4. Customer Relationships (CR)

— personal assistance, self-service, automated services, communities, co-creation.

5. Revenue Streams (R$)

— what do customers pay for and how? One-time sale, subscription, rental, licensing, advertising, brokerage.

6. Key Resources (KR)

— physical, intellectual, human, financial.

7. Key Activities (KA)

— production, problem-solving, platform/network.

8. Key Partners (KP)

— strategic alliances, joint ventures, suppliers.

9. Cost Structure (C$)

— what are the main costs? Cost-driven vs value-driven.

A business model describes the logic of creating, delivering, and capturing value. It answers the questions: Who are your customers? What are you offering them? How do you deliver this offer? How do you make money?

A business model and strategy are different concepts. Strategy describes how to win in competition. A business model describes how the business is structured. You can have an excellent business model and a poor strategy (no differentiation), or a good strategy and a non-working business model.

1. Customer Segments (CS) — for whom are you creating value? Mass market, niche, segmented, multi-sided (platform)?

2. Value Propositions (VP) — what value do you create for each segment? Novelty, performance, customization, design, brand, price, risk reduction, convenience.

Definitions

Functional job

— what the client literally wants to do: "move things from apartment A to apartment B."

Social job

— how the client wants to look in the eyes of others: "appear to be a successful entrepreneur" when choosing an expensive office.

Emotional job

— what the client wants to feel: "feel safe," "relieve anxiety."

"People don’t buy a drill — they buy a hole in the wall," is a famous quote attributed to Theodore Levitt. Jobs-to-be-Done (JTBD) develops this idea: customers "hire" products and services to do a specific job in their lives.

Clayton Christensen, the author of the concept: "A job is the progress that a person seeks to make in specific circumstances."

Functional job — what the client literally wants to do: "move things from apartment A to apartment B."

Social job — how the client wants to look in the eyes of others: "appear to be a successful entrepreneur" when choosing an expensive office.

Definitions

Product Sale

— a one-time transaction. Simplicity and predictability for the customer, but the business cannot forecast its revenue.

Subscription (SaaS)

— periodic payments for access. Predictable revenue (ARR/MRR), high LTV, high acquisition costs. Key metrics: churn rate, NRR (net revenue retention). Example: Salesforce, Netflix, Microsoft 365.

Freemium

— the basic product is free, advanced features are paid. Lowers the barrier to entry but requires work on conversion. Dropbox: free 2 GB, paid — more space and functions.

Transactional Commission

— a percentage from each transaction. Scales with volume growth. Stripe (2.9%+30¢ per transaction), Airbnb (17% total).

Licensing

— the right to use intellectual property. Qualcomm: chips are “free,” royalties for 5G patents — billions.

Advertising

— free product in exchange for users' attention. Google, Facebook, YouTube. Requires a huge audience and data.

Razor & Blade

— you sell the “razor” cheaply, earn on the “blades.” Printer is cheap — cartridges are expensive. Nespresso: coffee machine is inexpensive — capsules have high margin.

Result-Oriented Models

— payment for the achieved result, not the process. McKinsey started offering fee-at-risk; Rolls-Royce — “power by the hour” (not engines, but flight hours).

The method of monetization is a strategic decision that affects the entire business model. The same value can be monetized in different ways.

Product Sale — a one-time transaction. Simplicity and predictability for the customer, but the business cannot forecast its revenue.

Subscription (SaaS) — periodic payments for access. Predictable revenue (ARR/MRR), high LTV, high acquisition costs. Key metrics: churn rate, NRR (net revenue retention). Example: Salesforce, Netflix, Microsoft 365.

Freemium — the basic product is free, advanced features are paid. Lowers the barrier to entry but requires work on conversion. Dropbox: free 2 GB, paid — more space and functions.

A channel is not just "where we sell"; it is a fundamental strategic choice that defines relationships with the customer, data, margin, and scaling.

Direct channels: D2C (Direct-to-Consumer) — selling directly to the end consumer. Control over data and customer experience, higher margin, but higher costs for customer acquisition and infrastructure.

Indirect channels: distributors, retail chains, marketplaces. Rapid reach, but loss of control over the customer experience, lower margin, customer data goes to the intermediary.

Omnichannel: a unified customer experience across all channels (online, offline, mobile). Nike: branded stores + website + app + retailers — a synchronized experience.

Definitions

Stage 1: Problem-Solution Fit

— proving that the problem is real and your solution effectively addresses it. Metric: qualitative interviews, willingness to pay.

Stage 2: Product-Market Fit

— the product creates enough value that customers want it again and again. Sean Ellis metric: “How disappointed would you be if the product disappeared?” — >40% “very disappointed” = PMF achieved.

Stage 3: Scaling

— systematizing customer acquisition. Building reproducible, scalable sales and value delivery systems.

Stage 4: Optimization

— increasing the efficiency of a mature business.

Premature scaling

— the main reason for startup failure. Scaling before achieving PMF burns money without proving anything.

Operational degradation

— growth rate outpaces operational capabilities: systems can’t keep up, quality declines.

Loss of culture

— during rapid growth, it’s difficult to preserve values. Google's “Don’t be evil” did not fully survive the IPO.

Each stage requires a different strategic focus, competencies, and organizational structure.

Stage 1: Problem-Solution Fit — proving that the problem is real and your solution effectively addresses it. Metric: qualitative interviews, willingness to pay.

Stage 2: Product-Market Fit — the product creates enough value that customers want it again and again. Sean Ellis metric: “How disappointed would you be if the product disappeared?” — >40% “very disappointed” = PMF achieved.

Stage 3: Scaling — systematizing customer acquisition. Building reproducible, scalable sales and value delivery systems.

Companies expand beyond their core business for several reasons: utilizing surplus resources and competencies, reducing dependence on a single market, achieving synergy, and responding to a slowdown in the core market's growth.

Related diversification is expansion into adjacent industries using existing competencies or assets. Amazon: books → electronics → cloud computing → grocery. AWS leveraged IT infrastructure accumulated for its core retail business.

Unrelated (conglomerate) diversification is entry into industries unrelated to the core business. Berkshire Hathaway: insurance, railroads, Coca-Cola, Apple, jewelry. This works when there are superior managerial competencies and capital.

Unrelated diversification creates value only if the corporate center can manage businesses better than they would be managed independently. This is rare. The "conglomerate premium" has long since turned into a "conglomerate discount": investors value conglomerates below the sum of their parts bec...

Vertical integration is the expansion of a company upward (towards suppliers, backward integration) or downward (towards consumers/distribution, forward integration) along the value creation chain.

Reduction of transaction costs: vertical integration is justified when: (1) assets are specific (require unique investments tailored to a particular partner) — risk of opportunism, (2) high uncertainty — it is difficult to specify all conditions in a contract, (3) frequent transactions.

Quality and confidentiality control: Tesla manufactures its own batteries and chips, Apple designs its own processors — in order to control quality and not disclose know-how.

Exclusive access to resources: integration upward to guarantee supply of a rare resource.

Definitions

Non-equity alliances

— contractual agreements: licensing, supply, marketing agreements. Flexible, simple, but fewer obligations.

Equity alliances

— exchange of shares: Toyota and GM created NUMMI (joint plant); partners hold stakes in each other’s companies.

Joint Venture (JV)

— creation of a new company together. Renault-Nissan-Mitsubishi Alliance is the largest automotive alliance. Sony Ericsson, Hulu (NBC+Fox+ABC).

A strategic alliance is a cooperative agreement between companies which may remain competitors in other respects. Goals: access to partner resources and competencies, entering new markets, sharing risks and investments, creating industry standards.

Non-equity alliances — contractual agreements: licensing, supply, marketing agreements. Flexible, simple, but fewer obligations.

Equity alliances — exchange of shares: Toyota and GM created NUMMI (joint plant); partners hold stakes in each other’s companies.

Joint Venture (JV) — creation of a new company together. Renault-Nissan-Mitsubishi Alliance is the largest automotive alliance. Sony Ericsson, Hulu (NBC+Fox+ABC).

The corporate center (Corporate HQ) in a multi-business company must create value for business units—otherwise it is a parasite. Test: did business units create more value when they were independent?

Portfolio management: buying undervalued businesses, selling divisions to better owners, optimal allocation of capital among businesses.

Transfer of competencies: best practices from one division to another. GE "Talent Management"—the leader development system was applied across all 130+ businesses.

Centralized functions: legal services, HR, IT, finance—economies of scale and specialization.

Definitions

Operational restructuring

— optimization of operations: cost reduction, layoffs, closure of inefficient facilities, process reengineering.

Portfolio restructuring

— change of set of businesses: sale of divisions (divestiture), spin-off, sale of parts of assets. AT&T — a long history of separations and mergers in search of optimal configuration.

Financial restructuring

— debt restructuring in financial difficulties: negotiations with creditors, debt-to-equity swap, bankruptcy (Chapter 11).

Spin-off

— independent separation of a division into a separate public company. Shareholders of the parent company receive shares in the subsidiary. Reasons: the market undervalues the division inside the conglomerate; a different corporate culture is needed...

Carve-out (subsidiary IPO)

— sale of a stake in the subsidiary company on the public market. The parent company retains control, attracts capital.

Restructuring is a change of strategy, structure, operations, or finances of a company to increase efficiency or prevent collapse.

Signals of necessity: sustained deterioration of financial indicators; an outdated business model (disruption); excessive debt; inefficient corporate portfolio; change in competitive environment.

Operational restructuring — optimization of operations: cost reduction, layoffs, closure of inefficient facilities, process reengineering.

Portfolio restructuring — change of set of businesses: sale of divisions (divestiture), spin-off, sale of parts of assets. AT&T — a long history of separations and mergers in search of optimal configuration.

Definitions

Step 1: Determine the key strategic question

— what decision are you making? Build a plant? Enter a new market?

Step 2: Identify key factors of uncertainty

— what can truly change the outcome? (A technological breakthrough by a competitor? Changes in regulation? Geopolitics?)

Step 3: Identify predetermined factors

— what will definitely happen (demographic trends, basic technology trends).

Step 4: Construct 4 scenarios

— along two key axes of uncertainty.

Step 5: Develop a strategy for each scenario

— what do we do if this happens? And this?

Step 6: Determine the core strategy

— what works in most scenarios. Identify "early warning signals" — what events say that we are in scenario X.

Traditional strategic planning assumes that the future is mostly similar to the past or amenable to forecasting. This worked in stable industries. In the era of technological breakthroughs, geopolitical shifts, and "black swans" — it does not.

Shell developed scenario planning in the 1970s — and was the only major oil company prepared for the oil crisis of 1973.

Step 1: Determine the key strategic question — what decision are you making? Build a plant? Enter a new market?

Step 2: Identify key factors of uncertainty — what can truly change the outcome? (A technological breakthrough by a competitor? Changes in regulation? Geopolitics?)

Definitions

Ignore

— only if disruption truly does not threaten. Rarely the right strategy.

Defend the core business

— accelerate innovation in response. Requires time.

Create a separate unit

— independent business unit with different metrics, culture, and freedom. AWS as a separate business within Amazon.

Acquire the disruptor

— buy the threat. Instagram, WhatsApp → Facebook.

Lead the disruption

— create the new wave yourself. Apple with iPhone disrupted its own iPod business.

Clayton Christensen described the mechanism by which successful companies lose to new entrants:

1. The market leader focuses on the best customers (high-margin segment) 2. The new entrant offers “worse, but cheaper” — captures lower segments 3. The leader ignores: “those are not our clients” 4. The new entrant improves the product, moves up the market 5. By the time the leader notices the t...

Examples: digital cameras vs Kodak; Netflix vs Blockbuster; Discord vs Slack for gaming communities.

Resource Allocation Problem: internal processes allocate resources to existing customers, not future ones.

Definitions

Objective

— ambitious, inspiring goal (qualitative): “Become the leader in customer service in the mortgage market”

Key Results

— measurable outcomes confirming achievement of the goal (quantitative): “NPS > 70; Average approval time < 24 hours; 90% of clients recommend us”

The traditional strategic cycle: analysis → strategy development → implementation → control. Time horizon — 3-5 years. In a rapidly changing environment (VUCA: Volatile, Uncertain, Complex, Ambiguous), such a cycle becomes outdated faster than it is implemented.

Agile, developed in IT, offers: short cycles (sprints), rapid feedback, readiness to change direction, minimum viable product (MVP) for hypothesis testing.

Agile strategy applies these principles: strategic hypotheses → rapid testing → adjustment → next cycle. Not a “5-year plan”, but “strategic directions + quarterly sprint plans”.

Objective — ambitious, inspiring goal (qualitative): “Become the leader in customer service in the mortgage market”

Definitions

Diversification

— of markets, suppliers, production sites. Reduces risk concentration, but increases costs.

Scenario planning

— for each scenario: how does business change? What do we do?

Political monitoring

— tracking signals of deterioration of the environment in key jurisdictions.

Structural protection

— separation of assets in different jurisdictions; avoiding single points of failure.

After a relatively stable world order in the 1990s–2010s, geopolitics has returned to the agenda of strategists: sanctions, trade wars, supply chain conflicts, technological decoupling (techno-decoupling).

Political risk: change of power, change in policy, nationalization. Political risk is especially significant for investments in developing countries and autocracies.

Sanctions risk: restrictions on trade, investments, financial operations. Since 2022, sanctions have become the most significant operational risk for many Russian companies and companies working with Russia.

Supply chain risk: dependence on a single region (China — 70% of supplies of critical minerals for batteries). COVID-19 and events of 2022 launched a global wave of “nearshoring” and “friend-shoring.”

Definitions

Ecosystem orchestrator

— a platform that sets the rules and standards. Apple App Store, Alibaba. Advantage: central position, data, commissions. Risk: regulatory pressure.

Ecosystem participant

— a specialized player deriving value from the platform. An app in the App Store. Risk: dependence on the orchestrator.

Transition strategy

— from participant to orchestrator: Amazon became a platform, starting from selling books.

The classical Porter theory considered competition as a zero-sum game. But in the modern world, companies often simultaneously compete and cooperate — “co-opetition” (a term by Brandenburger and Nalebuff).

Apple and Samsung: Samsung produces displays for the iPhone and at the same time competes in the smartphone market. Intel and Microsoft: "Wintel" — mutual dependence that strengthens the positions of both against competitors.

Ecosystem orchestrator — a platform that sets the rules and standards. Apple App Store, Alibaba. Advantage: central position, data, commissions. Risk: regulatory pressure.

Ecosystem participant — a specialized player deriving value from the platform. An app in the App Store. Risk: dependence on the orchestrator.

According to Harvard Business Review, only 10% of developed strategies are implemented. The problem is not in the quality of the strategies—the problem lies in execution.

Main reasons for the gap: Communication failure: middle managers do not understand the strategy. Survey: only 40% of managers can name the company's top three priorities.

Lack of resources: strategy requires investment, but the budget is allocated inertially, supporting existing activities.

Metrics not linked to strategy: KPIs measure operational efficiency, but not strategic goals.

Psychological roots: the stress of uncertainty; threat to status, power, accustomed ways of working; fear of incompetence in a new environment; loss of identity ("I've worked by this methodology for 20 years, and now you say it's outdated").

Curtis and Sibbert: the change curve — people go through stages (by analogy with grief): denial → anger → bargaining → depression → acceptance. The manager’s task is to speed up this process and minimize the "valley of despair."

John Kotter (Harvard) developed an 8-step model for successful change management:

1. Create a sense of urgency — "Why do we need to change right now?" 2. Build a guiding coalition — an influential coalition of change leaders 3. Develop a vision and strategy — a clear, inspiring future 4. Communicate the vision — everyone must understand and accept it 5. Remove barriers — struc...

Definitions

Functional structure

— divisions by function (marketing, production, finance). Effective for operational specialization, works poorly for diversified business.

Divisional structure

— divisions by products, markets, or geography. Each division is a "mini-company." Quick response to the market, but duplication of functions.

Matrix structure

— dual reporting: by function and by product/project. Theoretically efficient, but practically — "matrix = chaos" without strong culture and clear processes.

Network/project structure

— small core + external partners/contractors. Flexibility is maximal, but requires strong contractor management.

Alfred Chandler in 1962 demonstrated: organizational structure should follow strategy. If the strategy has changed, but the structure has not — effectiveness decreases.

Functional structure — divisions by function (marketing, production, finance). Effective for operational specialization, works poorly for diversified business.

Divisional structure — divisions by products, markets, or geography. Each division is a "mini-company." Quick response to the market, but duplication of functions.

Matrix structure — dual reporting: by function and by product/project. Theoretically efficient, but practically — "matrix = chaos" without strong culture and clear processes.

This phrase attributed to Peter Drucker reflects reality: even a perfect strategy meets defeat if the organizational culture contradicts it. ING Bank developed a brilliant strategy for digital transformation—and spent 18 months on cultural transformation before technological changes began to work.

Culture is “how things are done here.” It includes: explicit elements (values, mission, rituals) and implicit ones (behavior norms, taboos, “unwritten rules”).

Edgar Schein: three levels of culture: 1. Artifacts — visible (office design, dress code, rituals) 2. Espoused values — what is declared 3. Basic assumptions — deep beliefs, often unconscious

Innovative culture is essential for a strategy of differentiation through innovation. Elements: tolerance for mistakes, experiments, autonomy, rapid decision-making.

Definitions

Assumption control

— monitoring of the assumptions upon which the strategy was built. If the assumptions do not hold (the market did not grow, the competitor did not react as expected) → revise the strategy.

Implementation control

— tracking progress on strategic initiatives. "Are we on schedule? Are we getting the expected results?"

Strategic surveillance

— monitoring the environment to identify threats and opportunities not provided for in the initial strategy. "What is happening around us that could change the game?"

Special alert control

— response to critical events (crisis, competitor action, regulatory change).

A strategy is not developed once every five years and then put into a drawer. The strategic process is a continuous cycle: development → implementation → monitoring → correction.

Assumption control — monitoring of the assumptions upon which the strategy was built. If the assumptions do not hold (the market did not grow, the competitor did not react as expected) → revise the strategy.

Implementation control — tracking progress on strategic initiatives. "Are we on schedule? Are we getting the expected results?"

Strategic surveillance — monitoring the environment to identify threats and opportunities not provided for in the initial strategy. "What is happening around us that could change the game?"