Coursework.

1. Please define levels of strategy.

Corporate strategy deals with issues related to the portfolio mix of businesses held by a multibusiness organisation/corporation. Figure below shows how these three levels of strategy apply to
Rio Tinto, the international resources corporation. Rio Tinto has several different main businessesiron ore, copper, gold, energy, aluminium, diamonds and others. Corporate strategy within Rio Tinto
deals with issues such as:

What portfolio of businesses does Rio Tinto want to be in? What is its corporate view of what
type of organisation it wants to be?

How does this particular portfolio create more value for Rio Tinto than an alternative
portfolio?

How much resource should be given to each business?

What performance returns should Rio Tinto expect from each business?

Figure :Levels of strategy

Business strategy deals with how one particular organisation positions itself relative to its
competitors to create sustainable competitive advantage within its industry. Most strategic issues
exist at the business level. When managers use the term 'strategy', they often mean `business

strategy'. If a business is part of a multi-business corporation, it must consider how it competes

relative to its competitors and also in terms of the desires of the wider corporation of which it is a
part. For instance, business strategy at Rio Tinto deals with issues within each of the businesses- iron
ore, energy, copper, etc. Business strategy is constrained at Rio Tinto by the corporate strategy. Rio
Tinto's corporate strategy (which is the rationale for its particular portfolio) is to be a worldwide
leader in finding, mining and processing mineral resources, delivering high shareholder returns while
operating in an ethically and socially responsible manner, and being committed to long-term
sustainable development. For Rio Tinto Iron Ore, this means that the business, which is heavily
based in Australia, must globally explore for iron ore, seeking to be one of the largest iron ore
competitors, with efficient exploring, mining and processing, while considering the social and
environmental impact of its operations wherever they are. Growth and profitability are highly
desirable, but it must also manage a much wider set of organisational goals. Questions thus emerge:

Should Rio Tinto Iron Ore grow?

What customers should it sell to and where should it sell?

How should Rio Tinto Iron Ore compete in the world iron ore industry? What sustainable
competitive advantage should it seek to compete on?

What position should it aim to hold in the industry?

Functional strategy deals with how each function of the business will contribute towards achieving
the business strategy that has been set. Within businesses there are also business units- for example,
the Singapore business unit, the multimedia business unit and the order-processing team. Strategy for
such units is similar to what has traditionally been called functional strategy. The three levels of
strategy should be consistent with each other. Functional or unit strategy within a business such as
Rio Tinto Iron Ore is constrained by both the corporate and business strategies. Since Rio Tinto Iron

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Ore wanted to become one of the world's largest, profitable and sustainable iron ore businesses,
functional strategy for Rio Tinto Iron Ore would need to consider issues such as:

Where should Rio Tinto Iron Ore produce its product?

What exploration systems would be most effective for exploring for iron ore on a global
basis?

What marketing systems would be most appropriate for marketing iron ore on a global basis?

How should Rio Tinto Iron Ore accounting systems work to fit in with Rio Tinto's corporate
accounting needs?

The three levels of strategy within an organisation should be consistent with each other. When you
hear people talking about 'strategy', however, you need to determine which level of strategy they are
talking about. When we use the term 'strategy' in this book, we will primarily be referring to
'business strategy' issues. Unfortunately, the clear breaks between these three levels are more
theoretical than practical. Most businesses of any size have more than one product range and/or more
than one legal structure. They may consider themselves a 'corporation' even if there is one very
dominant business which determines most of the strategy for the organisation. Increasingly, we also
find that the concepts and thinking of business strategy are being applied at the functional and unit
strategy level. If a function or unit can be outsourced, it needs to have a business orientation to
demonstrate its value to the business. Consequently, there is some blurring of the distinctions
between these levels in practice, but the concepts are useful to apply as much as possible.

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2. Please describe the factors that influence the threat of news entrants to the industry.
Factors that influence the threat of new entrants to the industry include:

Economies of scale. Perhaps the most obvious barrier to entering an industry is where there is a

need for large-scale production in order to be cost-efficient (e.g. in the motor vehicle industry) .

Proprietary product differences. Where existing products are unique in some way and these

differences cannot be replicated, it is difficult to enter the industry. Prescription, pharmaceutical

company patents on new medicines prohibit competitors from producing similar products for a long
time.

Brand identity. If existing producers in the industry have established their brands (e.g. as

Microsoft has been able to do in the computing software industry), this can be an effective barrier to
entry. Usually brand identity is related to proprietary product differences that have created the brand.

Buyer/customer switching costs. If it is difficult to switch from an existing producer to a new

entrant, even if the new entrant's product is superior, this can be a significant barrier to new entrants.
For instance, once a software application is installed in an organisation (e.g. SAP or PeopleSoft
systems) and tailored specially for the organisation, it becomes very difficult to switch suppliers at a
later stage because of the uniqueness of the software,

Capital requirements. Related to the economies of scale argument, high capital requirements

limit the number of potential new entrants (e.g. resources and chemical industries). New entrants
with good ideas but without finance are unable to break into these industries.

Access to distribution. Inability to distribute the product can kill even the best products. For

instance, independent movie producers find it difficult to gain good access to the public because
most movie theatres are controlled by a small number of chains-Hoyts, Village Roacishow and
Greater

Union in Australia-which purchase packages of films direct from the major US distributors.

Absolute cost advantages. Clearly, if existing organisations have absolute cost advantages over
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new entrants, new entry is difficult. Such cost advantages could be built up through production
experience resulting in efficiencies that are difficult to replicate, control over cheap raw materials,
and low-cost design, operation or distribution (e.g. production of computer chips).

Government policy. This remains a barrier in many small-economy or developing countries,

such as China and India. Airlines, post, radio, TV, telephones, energy utilities, water suppliers,
banking and education are just some of the industries that have either been government owned or
have been highly regulated by government. Government policy on foreign investment can also
prevent foreign firms from entering some countries. For instance, China's admission to the World
Trade Organization in 2003 greatly reduced its government's power to keep foreign firms from
setting up operations in China, or exporting products into China.

Expected retaliation. One of the most important barriers to entry in our view is the retaliation

from existing competitors. Retaliation by Qantas and Ansett in 2000 to the entry of Impulse and
Virgin to the Australian domestic airline industry led to two of the four firms exiting the industry in
just 12 months, as fares were dramatically cut by all four competitors.

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3. Please describe the factors that influence the power of suppliers to the industry.
Factors that influence the power of suppliers to the industry include:

Differentiation of inputs. If a supplier's input is crucial to the final product, that supplier will

have power. For instance, when buying computer packages, customers have come to value the
software more than the hardware. Consequently, the key software suppliers have been able to
maintain their prices much better than hardware suppliers, whose inputs are not perceived to be
differentiated as much as they were.

Switching costs of suppliers and firms in the industry. Some suppliers supply their products in

special containers which need to be refilled, once installed in the producer's plant. Consequently, this
may lock the producer into a particular supplier because only that one supplier has the equipment
needed to refill the container. Other examples are the use of long-term contracts for maintenance or
service and the formation of strategic alliances with suppliers.

Presence of substitute inputs., Regardless of the cost of a supplier's input, if it is crucial to the

performance of the producer's final output, suppliers will have power over producers. Prescription
pharmaceutical companies have power over hospitals since their drugs are important for patient
wellbeing.

Supplier concentration relative to industry concentration. A small number of suppliers means

that suppliers will have power. Car manufacturing is done by only 10-20 manufacturers globally, yet
there are hundreds of component manufacturers. Obviously, manufacturers will have a lot of power
over component suppliers, other things being equal.

Importance of volume to suppliers. If the volume being sold to the industry is not important to

suppliers, they will be less concerned about it and hence be unlikely and unwilling to bargain.
Supermarket chains have a great deal of power over suppliers relative to individual supermarkets.
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Cost relative to total purchases in the industry. If the supplier's cost is a small part of the total

cost of supplies, the industry will not be too concerned about it, thus giving suppliers the power to
raise prices and increase margins without experiencing retaliatory action. For instance, when
organisations tended to operate locally they were not very concerned with local telephone costs.
Consequently, telcos were able to charge a premium price for long distance calls. However, as
organisations tended to geographically diversify their operations, long distance and international
telephone charges for some organisations rose substantially. The costs became an important factor,
and telcos were forced to offer discounts, untimed package rates and other incentives to try to avoid
major customers switching suppliers or utilising new technologies such as Voice over IP.

Information about supplier's product. If the supplier's product is complex, intangible or unique,

the industry may have difficulty understanding just exactly what it is buying and may be wary of
substitutes. This will give suppliers power, relative to the situation where the industry knows exactly
what it is they are buying and how it works. Prescription pharmaceutical products are a good
example of this.

Supplier profitability, if suppliers are unprofitable, they will be unable to bargain and are likely

to make close to their best offer at the first opportunity. The reverse will be true for very profitable
suppliers.

Decision makers' incentives. Often, in purchasing, there are incentives for the purchasing

decision maker (e.g. free tickets, free trips, conferences at exotic locations to learn about the
supplier's product). The aim of this, and its likely effect, is to give power to the supplier over the
decision maker, regardless of the relative merits of the individual supplier's product.

Threat of forward integration. If suppliers are large organisations relative to those in the industry

and/or if suppliers have the power to enter the industry, then suppliers will have considerable power.
For instance, petrol refiners are able to operate their own petrol retailing outlets, giving them a role
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in setting retail price benchmarks and also providing them with information on the real cost
structures of the retailer.

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