STRATEGY I

(Draft, Dec 2003)

Prof. R. Kabaliswaran Room 7-14 TISCHB01.2103.30 Email: rkabalis@stern.nyu.edu

Class Hours: Tuesdays.: 6:00 - 9:00 P.M. (Feb 10 to March 23). Finals: 3/21.Office Hours: Tuesdays.: 5:00 - 5:40 P.M. & by appointment

Course Description

Welcome aboard! We meet for 6 sessions once a week. Before our class starts, please buy two books at the bookstore and, if possible, read the first chapter in the Ghemawat text, plus the first 2 chapters in the BSA readings book, we cover in our 1st class. Because this is a short course,it is important that you be prepared for each class discussion.This course provides students with the concepts and tools required to devise strategies thatenable the business to create superior value for chosen customers and to capture a sufficientshare of that value in order to create an economic profit on its investment. The course focuses onthe gaining of competitive advantages at the product/market level.The course builds a model of competitive advantage, applies it to the competitive marketplace,and identifies the key sources by which firms can gain competitive advantage. It provides thebasic set of tools that enable students to analyze and define the competitive situation at theproduct/market level, to delineate the strategic options open to the firm to create or retaincompetitive advantage. Students evaluate those options from several perspectives: strategic,financial, technological, legal and organizational, for business strategy is multi-dimensional.

This course is built on several key arguments:

1. The first argument is based on the understanding of competitive strategy in battle and high stakes games in which the outcome is highly valued. The main argument in this theory is that one does not play such a game 1) unless one has a competitive advantage which creates a positive probability of winning and 2) gains from winning must out weigh possible losses.

2. The second argument says that marketplace exchange creates value. In this context, the objective of business strategy is to be able to create and capture value through exchange sufficient to earn an economic return on invested capital—the amount one bets on the game.

3. The third argument says that in competitive markets, firms compete to create superior value for customers as that value is defined and perceived by those customers.

4. The fourth argument says that competitive markets are efficient in the long run and that to create economic profits a firm must have an economic advantage versus

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competitors in creating that value. Competitive advantage, whatever its source in the firm’s value chain, must have its effect at the product/market level. Competitive advantage may often be transient.Sustainable advantage requires a deeper understanding of core competencies.

5. The fifth argument says that the firm has choices about 1) the exact value proposition to be offered, 2) the market segments and customer groupings it chooses to serve, 3) the position it will occupy in an industry value chain, 4) the way it configures its value chain, and 5) the ways in which it organizes its activities.

6. Our business environment is becoming increasingly turbulent and thus, each firm’s strategies and outcomes are interdependent on the choices made by others. In such dynamic and interdependent markets, it is often not possible to "go it alone". A firm often must collaborate with others in order to compete in the marketplace.

7. The processes by which competitive advantage is achieved are varied and are more often opportunistic, serendipitous, and ill-defined than formal and planned because of the limits to human comprehension, influences of competitive actions or shifts in the larger environment.

8. This course prepares students with sets of tools to analyze strategic situations and to make strategic recommendations. Students learn the organizational issues within which such strategy decisions are made in the Management of Organizations course. Lastly, this course assumes that the strategic recommendations must be capable of being executed as described.

TEXT & READING Two Texts are in the Book Store. Other class materials will be hand outs.

1. P. Ghemawat, Strategy and the Business Landscape. Prentice Hall, 2001. (Text)

2. Business Strategy Analysis Custom Readings and Cases, Pearson Publishing SolutionsCustom Edition. (BSA Readings) ( BSA ). Available at the NYU Professional Bookstore.

GRADINGGrading will be based on the following:

Class Participation 10%Intel/AMD Case (group) 20%Barco Assignment (group) 20%Final Exam (Individual) 50%

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SCHEDULE OF ASSIGNMENTS

Session# Date Topic and Readings

Session 1. 2/10 A Theory of Competitive Advantage . Text: Ch. 1. The origins of strategy. BSA: Reading 1. The concept of strategy in marketing

Session 2. 2/17 Formulating Competitive Strategy. Text: Ch.2. Mapping the business landscape: Supply- Demand Analysis; Five Forces Model: The Value Net. Text: Ch.3 Creating Competitive Advantage: Cost Analysis; Differentiation Analysis; Added Value; Using Activities to Analyze Relative Costs.BSA: Reading 2. The Principles of Marketing Warfare; The Market Selectivity Hierarchy. BSA: Reading 3. Value Based Strategies; How to Use A Value Map.

Session 3. 2/24 Efficiencies from Experience. BSA: Reading 4. Operations Cost Behavior and the Experience Curve. Matching major stages of product and process life cycles;The Strategic Impact of Experience on Prices; Is Market Share the Key to Profitability? Case: Wal-Mart. Superior Value via Operations and Cost Structure

Session 4. 3/2 Defining the Competitive Situation.BSA: Reading 5. Technology as a Source of Value. Theories of Technological Innovation.Case: INTEL vs AMD. Group Case Assignment (4 page report) Due!

Session 5. 3/9 The Dynamics of Competition.Text: Ch. 4. Anticipating Competitive & Cooperative Dynamics: Competition and Cooperation Among the Few; Evolutionary Dynamics; Threats to Added Value and its Appropriability.BSA: Reading 6. The product Life Cycle. Models of Competitive Entry and Strategy. Case: Browser Wars

Session 6. 3/23 Competing on Technology & Operations.Case: Barco v. SONY. Group Case Assignment (4 page report) Due!Text: Ch. 5. Building and Sustaining Success: Activities vs Resources; Making Commitments and Developing Capabilities. The Challenge of Change.Virtual Firms: Compression of the Value ChainCase: Dell Online (Discussed); Interview with Michael DellCourse Review for Final. Key Course Concepts & Cases

Final Exam 3/28

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Session Objectives & Discussion Questions

Session 1 What is Business Strategy? A Theory of Competitive Advantage.

1. 1 A Roadmap of the key business strategy concepts for this course.2. Why must Business Strategy today be dynamic, not static?3. A multi-dimensional perspective is vital in Business Strategy: It integrates most other

courses.4. Advantages of First Mover, Fast Follower; using strength against weakness.5. Pros and Cons of Defense & Attack as Strategic Alternatives. Military Strategy and

Business.6. Use insights from military strategy, game theory & bio-evolution for competitive

advantage.Questions: What are the pros & cons of the war metaphor for strategy?Does it apply to: Coke vs. Pepsi; Boeing vs. Airbus; Charles Schwab vs. Merrill?

Value Creation & Capture of Value: Forces Impacting Industry Competition1. How superior value creation is the objective of marketplace exchange competition.2. How your business can create more value & capture share of that value for the firm.3. How to analyze an industry Value Chain and your firm’s place in that chain.4. Use the Five Forces Model to analyze industries and markets for their profit potential.5. Focus firm resources on attractive segments of an industry to gain competitive advantage.6. How to identify a firm’s sources of competitive advantage.

Questions: What are Strengths & Weaknesses of Porter's 5 Forces?How Does it Apply to: Microsoft, Citigroup, Exxon and giant integrated oil firms?

Session 2Formulating Competitive Advantage

1. Define a SWOT Analysis2. How to Formulate Business Strategy through a SWOT analysis3. How to use the Generic Strategies Matrix to determine the source of your firm’s

competitive advantage.4. Consequences of Strategic Choice: Low Cost vs. Differentiation5. How to use the Competitive Advantage/ Market Attractiveness matrix to determine a

firm’s strategic choices.6. Decision Trees can delineate the specific choices a firm has to achieve its objectives

Questions: How Can Your Firm’s Strength become a Weakness? SONY BetamaxHenry Ford’s Model T vs. GM; Apple Computer vs. Microsoft; Merrill vs. E*Trade

Creating Superior Value & How To Use The Value Map1. How to Identify Your Firm's Sources of Competitive Advantage to Create Superior

Value.2. How to use your firm’s sources of advantage to create superior value via lower costs, or

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higher differentiation.3. How to use the Value Map to define the Value Positions held by Competitive Offerings

and to define your firm’s strategic direction4. How to use the Value Map in The Financial Services Industry: Merrill Lynch vs.

E*Trade5. How to evaluate the strategic competitive changes in your offerings in the market along

the commodity-specialty continuum.Questions: How Can you place your firm on the Value Map? Will its position shift over time?

Session 3Creating Value By Compressing A Firm’s Cost Structure: The Value ChainCost Structure & Cost Behavior Over Time

1. How to analyze your firm’s cost structure to determine its impact on the firm’s strategy2. The Experience Curve: How Behavior of A Firm’s Costs Change over time and Volume.3. The Value Chain = Operations that Create Value & The Costs of Each Operation.4. How to define the elements of your firm’s Value Chain.5. How to analyze the contributions a firm’s operations on its ability to create superior

value.6. Compressing Your Firm’s Cost Structure By Using Its Value Chain. Think of an

example.7. How to identify a firm’s cost drivers and their economic impact on its overall future

strategy.Question: Name five ways General Motors could compress specific costs in its value chain.

Superior Value Via Operations and Cost Structure: Wal*Mart’s Value Chain

1. In Which Industries are Operations A Dominant Sources of Competitive Advantage? Why?

2. How did Wal*Mart’s Control of its Value Chain Operations Transform the Retail Industry?

3. How did US and Foreign Retail Competitors Respond to Wal*Mart?4. How to Estimate the Comparative Cost Structure Components of Your Firm’s

Competitors.5. How to Analyze Why Your Competitors’ Cost Components are Lower than Your Firm’s.

Wal*Mart Case AnalysisQuestions: What are the Causes of Retail Industry Transformation? How is Wal-Mart Vulnerable? What are Your Strategic Recommendations for Wal*Mart?

Session 4Defining the Competitive Situation of INTEL vs. AMDIntel vs. AMD Group Case Assignment Due

1. How to define the competitive situation of Intel vs. AMD.2. How to define your firm’s competitive situation.3. How to use a situation analysis to set the objectives your strategy must achieve.4. For Intel and AMD, What forces affect both Offensive and Defensive Strategies?

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5. How to Apply Key Strategy Concepts to the battle of Intel vs. AMD that is still unfolding.

Question: For Intel & AMD, Why must victory preserve the value of the objective?

Technology as a Source of Value And Network Economics1. How to Use Technology as a Competitive Advantage To Create Superior Value2. How to use an Understanding of the Theories of Technology Progress and the Law of

Limits as the basis for Assessing the Competitive Environment3. How to use technological innovation to create competitive advantage.4. How to define Your Firm’s Technology Strategy. How to target that strategy.5. Role of Network Economics and Increasing Returns to Scale in Technology Strategy

Positive Feedback Dynamics of Network Economics: Virtuous Cycles: Vicious Cycles.Read: BSA Readings 5. and Ghemewat: Chapter 3. p. 60-74.Question: How does strategy change when we shift from lowest cost as the basis ofcompetition to the continual introduction of new products from new technologies as thebasis of competition? Consider: the original Ford, IBM, Kodak, ATT, NCR Computer.

Session 5 Anticipating Competitive and Cooperative Dynamics

1. Why you must learn how to anticipate competitor's retaliation to your strategic actions.

2. How to use an understanding of industry dynamics to create business strategy3. How to use the product life cycle, the product evolution cycle, the population ecology

model, and the competitive entry cycle to assess the future evolution of an industry and the strategy of the firm

4. How to identify the transition points in an industry’s evolution to identify the strategic windows during which a firm can successfully change its strategy and the dynamics of an industry

5. How to strengthen your firm’s competitive advantage to become a sustainable advantage.

Question: How can you best collaborate with your competitors? IBM, Oracle, Sony, Toyota.

Browser Wars Case: Managing Dynamic Changes and Strategic Coopetition1. What the Browser Wars Case reveals about major industry battles for competitive

advantage.2. Vital Importance of Industry Standards Setting On the Impact of Winners vs. Losers.3. How to Simultaneously Compete and Cooperate with Others as Basis of a Firm’s

Strategy4. The Complex Roles of Allies, Suppliers, Buyers, Competitors, and Governments in

Strategy. Learning how to Manage during Dynamic Change and how Best to use Strategic Cooptition.

Question: How does the U.S. court ruling against Microsoft effect the strategic situation ofcompetitors, suppliers, corporate buyers, allies, and of complements

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Session 6

Competing on Technology & Operations: Barco Projectors vs. SONY CasePrepare and Submit as a Group: Barco Projection Systems vs. Sony Case Assignment

1. How to assess the relative technology, operations, and cost positions of competitors to formulate competitive strategy.2. How the changing dynamics of competition in an industry redefine the strategic situation

facing competitors.3. How to assess the importance of timing in executing strategy.

Question: What are the implications for strategy at different stages of the product life cycle?Drug Giants & Biotech Firms, Auto Firms & Computers.

Virtual Firms & the Compression of the Value Chain: The Dell Computer Case1. How firms can achieve both low cost and differentiation strategies combined: Dell

Computer2. How Industries Evolve as a function of a) New Technology and b) the Competition

among firms for customers.3. How to understand the bases of competition and the Impact of the Internet on the

economics of an industry.Questions: What’s the competitive advantage of Virtual Firms like Dell Computer?What are the competitive advantages of a the pure online firm: E Bay?

Review of Key BSA Course Concepts and Cases for Final Exam .Analyze key concepts in business strategy & relate to the cases to prepare for the final exam.1. Why we use war & game theory, behavioral theory, and bio-evolution in business strategy.2. Why you must skate to where the puck is going to be, not to where it is.3. How to Compete in Industries in which the Business Models for Value Creation, the Technology Driving the Industry, and Ally Coalitions are constantly in a state of flux.

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Case Preparation Note Assignments

Wal*Mart The purpose of this case is:1) To allow you to identify and quantify the sources of Wal-Mart’s competitive advantage indiscount retailing,2) To assess how sustainable their position in discount retailing will be in the future3) To address the prospects for their diversification moves.4) How is Wal-Mart Vulnerable?6.) Your Strategic Recommendations for Wal*MartDiscussion Questions1) What are the key elements of Wal-Mart’s competitive strategy? How has the firmdifferentiated itself?2) Does Wal-Mart have a competitive advantage over its competitors?3) Identify the sources of that advantage and quantify each in financial terms.4) How well are the functions aligned with Wal-Mart’s overall competitive strategy?5) What criteria should be used to judge Wal*Mart’s different strategic options?Which one(s) would you choose and why?

Intel vs. AMDThe purpose of this assignment is:1) to give you practice in applying the tools from the “Formulating Competitive Strategy”lecture and readings to a very “live” case with2) the end result being a definition of the strategic situation in which AMD finds itself in themicroprocessor industry.InstructionsThe case you have received in the case packet, Intel Corp., 1968-97 tells primarily the Intel sideof the case. To complete the case, you will need to research, in the popular business press, 1) theAdvanced Micro Devices side and, also, 2) the actions that Intel has taken since 1997.

Group AssignmentThe case preparation note you are to submit, as a team, is to contain the following sections, in theorder listed, and in no more than 4pages, at least 1.5 lines spacing, 10 to 12 pt. type with one inch margins.

The strategies being pursued by each competitor together with the reasoningyou used to determine that conclusion A SWOT analysis for AMD, Your definition of the strategic situation AMD faces. Briefly recommend a strategy for AMD and for Intel.

The Browser WarsThe purpose of this assignment is to:1. offer you an integrative case on the nature of competition in contemporary hi-tech markets2. introduce you to the strategic importance of standards battles

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Assignment: Read the Browser Wars Case HandoutAs you read these pages, please address the following Develop a model of competition in this field. How is it different from othermodels of competition that you know of? Try to draw a model of Competition in this field.

Barco Projection Systems vs. SONYThe purpose of this assignment is:

1.To give you practice in comparing two different business strategies in the same marketplace,2. To help you to understand how operations and technology contributes to creating superior value, and4. To be able to define and evaluate a firm’s strategic options in response to acompetitor’s action.

Group Assignment: The case preparation note you are to submit, as a team, is to contain the following sections, in the order listed, and in no more than 3pages, at least 1.5 lines spacing, 10 to 12 pt. type with one inch margins. Describe the key elements that define the competitive strategies of both Sonyand Barco in the projection systems market. How does each firm define creating superior value? How did they arrange their business functions to support that definition? Draw the value map of the offerings in the projection systems marketplace(including Barco’s options).

Dell OnlineThe purpose of this assignment is:

1. How Dell is able to combine both generic business strategies: Low Cost And Differentiation

2. Moore broadly, to explore the impact of the internet on industry value chains and a firm’s business strategy.

3. To help you learn how to evaluate the potential of an internet sales channel4. How to structure the channel5. How to measure the performance of the channel.

Study Questions How would you judge Dell’s online success? What Advantage does Dell derive from its online success? How substantial and sustainable are those advantages in comparison to its competitors?

Which of Dell’s competitors should it worry about? Why? How should Dell go about conducting 75% of its business over the internet by the year

2001

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Useful Research Links

The following links should be helpful in finding relevant information for your case analyses. All of the sources have free data, although a few charge for access to "premium" information. I don't recommend that you pay for the premium services, just use the free stuff. If you know of other links that don't appear here but would be useful please email them to me.

SEC EDGAR Database of Corporate Information    Use this site to find 10K and 10KSB (annual reports) as well as other reports (e.g., 10Q, 8K) for publicly traded firms. Another filing that could be of interest is the DEF14A which covers CEO compensation.

Bobst Library Databases     Use this site to access ABI/Inform which provides citations, abstracts and full text of articles from business and trade journals published in English. Covers business topics in general, particularly advertising, banking, finance, insurance, international trade, management, marketing, and real estate. Can be searched by author, title, subject or keyword(s).

The following sites provide a description and links to business and economics information resources that Bobst Library possesses:

Research Guide for Company and Industry InformationBobst Library U.S. Business and Economics ResourcesBobst Library International Business and Economics Resources

The following are great sites for searching for information on high technology companies and industries: News.com TechWeb Wired.com

Electric Library    This site is a great source for general company information.

BRINT Research Tools    This site is a business researcher's index. You can access hundreds of articles, cases, studies and tools. Go to the "Information Search" in the table of contents and select "Starting Points for Business and Technology Research."

Wall Street Research Net    This is another aggregation site that contains over 500,000 links to just about any research source you could imagine. It is intended for individual equity investors, but it is an extremely useful site for strategists.

CEO Express    This is a good source for both industry and firm data. Very much like a research service organized by CEOs.

Economic Data and Links     A good source for macro environmental data.

PeerScape    A great source for financial information. Very good comparative performance analyses and ratios. You need to go through a membership form, but the basic service is free. You need to have Adobe Acrobat reader to view and print the reports.

Yahoo Listing of Industry and Trade Associations    Some trade groups provide very good industry and macro environment information, but many don't provide any. Take a look.

Don't forget to check individual company websites!