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Business Strategy B01.2301.22 Spring 2004

Adam Brandenburger

J.P. Valles Professor of Business Economics & Strategy 7-74 KMC (office) 212.998.0430 (v)

abranden@stern.nyu.edu

Class times: Tuesdays & Thursdays 3:00-4:20pm Office hours: Fridays 2:00-5:00pm

Teaching Fellow: SeungEun Lee (sl881@stern.nyu.edu) 1. Introduction In this course we are going to learn how to ‘think strategically’ about business. Our approach will be to develop some maps, mindsets, and methods designed to help you understand the strategies that businesses employ and also to help you generate new strategies. The maps we’ll draw are ways of picturing the ‘landscape’ on which businesses operate. They give a picture of all the players that the strategist has to consider—the suppliers of a business, its customers, competitors, partners, and more. The maps envisage these players as being involved in creating a ‘value pie’ and in trying to capture a share of that pie. We’ll look at several strategic maps, because our view is that there is no one complete map. Different maps highlight different aspects of the business landscape. A good strategist recognizes this and is careful not to have blindspots.

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Being aware of the danger of seeing things only one way, of working with only one framework, is part of the mindset that we’ll promote in the course. We’ll try to be flexible in our thinking, while at the same time rigorous. Of course, lots of people have written about the ‘mind of the strategist,’ and we’ll talk about their ideas in the course. A quick preview: Michael Porter (of Harvard) says that the essence of good strategy is making choices—as much about what not to do as about what to do. A business that isn’t disciplined in this way, he says, is unlikely to be successful. Andrew Grove (chairman of Intel) says that the job of the strategist is to think about the things everyone else forgot to think about—to spot the ‘errors of omission,’ if you like. Someone has to ask: Is there a new competitor that we haven’t even recognized yet? Is the way we assume our customers use our product actually the way they use it? Etc. These are the kinds of questions strategists ask, Grove says. (In the course, you’ll have to be sure that you don’t just apply the strategic frameworks we’ll learn, but also ask yourselves what each framework leaves out.) A third example of mindset: Everyone knows that competition is part of business. But so is cooperation. Often, businesses have to be able to think about both competing and cooperating with other businesses at the same time. Another example is thinking about ways in which businesses can turn their weaknesses into strengths, or even turn their competitors’ strengths into weaknesses. We’ll see examples of these mindsets, and the strategies they lead to, in the course. A good map and mindset help in coming up with good strategies. But we’ll also want, as much as possible, to have concrete methods for generating strategies. We recognize that luck, serendipity, instinct etc. can all be explanations for where a clever strategy comes from. (By the way, this doesn’t mean we shouldn’t try to understand why such strategies work and whether they can be applied elsewhere.) Nevertheless, we’ll try to describe the different kinds of strategic ‘levers’ that are possible. The goal is to avoid simply looking for strategies in a hit-or-miss fashion, and rather to have a systematic method. You often hear that strategic thinking is about ‘thinking outside of the box.’ This course is designed to give you some tools—in the form of maps, mindsets, and methods—to find your way out of the box. Finally, there is another, very important objective for the course. Over your careers, you’ll read many books, magazine articles etc. on business strategy. You’ll need to be critical and discerning readers—looking for the good ideas, but also looking for the limitations. In the course, we’ll make a start on developing these skills in what we read and discuss together. 2. Course Content The course is divided into five modules, as in the diagram below. (You can find a detailed day-by-day schedule in Section 6.)

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The questions addressed in each module are as follows:

Mapping the Business Landscape: Who are the players you face in the game of business?

Adding Value: What determines how much value you capture?

Defending Against Imitation: How can you outrun rivals?

Attacking Incumbents: How can you win as a challenger?

Coordinating Across Businesses: How do you optimize the whole business, not just the parts?

We will also discuss cases illustrating the ideas of each module—on Intel, Wal*Mart, easyJet, Coke and Pepsi, Newell, 3M, Daimler-Chrysler, and Disney. 3. Philosophy of the Course This section describes some of the ‘design rules’ that are behind the course, and that we’ll follow in the classroom. 3.1. Theory vs. Practice? In the course we’ll develop theory together, and discuss examples and cases. The theory will be a very important part of what we do. You sometimes hear that theory can’t properly capture the complex and changing world of business. Actually, it is lack of

AttackingIncumbents

CoordinatingAcross

Businesses

Mappingthe

BusinessLandscape

AddingValue

DefendingAgainstImitation

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theory that can’t.1 Having a theory forces you to spell out your assumptions. Without this, you can’t tell when today’s “winning strategy” will turn into tomorrow’s bad idea. We believe that there is nothing so practical as a good theory, and we’ll make sure that the ideas of the course are grounded in solid theory. 3.2 Case Discussions When analyzing cases, we will want to apply the frameworks of the course, but we will also want to let the cases ‘speak for themselves.’ Let’s try not to force frameworks on cases. Better is to look at the history of the business and try to understand what were the key events that led to its success (or failure). Often, these key events can seem small, so we’ll have to look carefully. All this applies equally when we want to try to predict the future of a business. To know where a business is going, you need to know where it came from. In sum, use the tools of the course to analyze the cases, but use your judgment too! 3.3 Legal and Ethical Aspects Discussions of Business Strategy may touch on legal issues. For example, antitrust laws determine, among other things, what types of business contracts are legal and what types are not. In this course, we will try to note some of the legal issues that can arise. This is the important domain of courses on the law and business. A course on Business Strategy—probably any course at all on business—will likely also raise very basic questions about what is ethical behavior in business, what is the purpose of business, etc. These are legitimate—indeed, vital—matters for discussion. 3.4 The Course and Beyond Some of the ideas I’ll bring to this course I have taught many times. But some course materials will be untested, as I try out new ideas that I think are important. I hope we’ll have many successes together in the classroom, but there are bound to be a few failures as well. Still, I hope that even the failures will be, to use the language of the Apollo 13 mission, “successful failures.” (And I am pretty confident that we’ll arrive at the end of the course in one piece.) Most important, I consider the course only the start of a conversation among us that I hope continues long after the course itself is over. 4. Grading and Attendance There will be three graded pieces of work: (1) a team write-up of our first case (on Intel); (2) a course-long team project (described in Section 8 below); and (3) a take-home final exam. These will account for 20%, 60%, and 20% of the overall grade, respectively. The case write-up and course-long project are opportunities to start applying the ideas of the course at the same time as we are learning them. The final exam will, in effect, ask you to come up with your own summary of the course. Everyone is expected to attend all classes and to participate actively in class. The classes will be interactive lectures and discussions, and so we will all depend on everyone’s active involvement. Comments and questions are equally good ways of participating. Over the course, I will make a

1 As an aside, evolutionary theorists believe that our ability to think abstractly arose precisely because our ancestors had to adapt to rapid changes in the climate about 250,000 years ago. (See “Why Get Smart?” Science, Vol.295, 02/15/02.)

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judgment about each student’s level of involvement in class discussions, and, if a student’s written work falls between two grades, use this to decide the grade. If you need to miss a class, please send me an email (in advance, if at all possible) letting me know. Remember that the course depends on each of us being present and participating. 5. Course Materials There will be slides to accompany each lecture and case discussion. These will be posted on Blackboard. The principal text for the course is Strategy (Pearson Custom Publishing, 2004). Please read through this alongside the course. (The schedule below suggests specific readings for specific classes.) You will also receive Corporate Strategy (by David Collis and Cynthia Montgomery, McGraw-Hill Custom Publishing, 2004). This is to accompany the Coordinating Across Businesses module of the course. 6. Detailed Schedule The table below gives a detailed schedule of classes, topics, and readings. Session/Date Topic Readings and Due Dates 1. 1/27 Course Introduction

MODULE 1: Mapping the Business Landscape

2. 1/29 Value Creation The Value Net

Brandenburger-Nalebuff, “Co-opetition,” pp.249-274 in Strategy Ghemawat, Chapter 2, pp.19-48 in Strategy

3. 2/3 The Value Net contd. The Five Forces

Brandenburger, “Porter’s Added Value: High Indeed!” pp.275-277 in Strategy Ghemawat, Chapter 2 contd.

4. 2/5 The Five Forces contd. SWOT Submit Project Memo

MODULE 2: Adding Value

5. 2/10 Added Value Ghemawat, Chapter 3, pp.58-60 (“Added Value”) in Strategy

6. 2/12 Added Value contd. Value Spreads Ghemawat, Chapter 3, pp.49-58 and 60-74

7. 2/17 CASE: INTEL Submit Intel Write-up

8. 2/19 Value Spreads contd. Ghemawat, Chapter 3 contd.

MODULE 3: Defending Against Imitation

9. 2/24 Experience, Scale, & Scope 10. 2/26 Project Presentations #1 Submit Set #1 of Project Slides

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11. 3/2 CASE: WAL*MART

12. 3/4 Increasing Returns Ghemawat, Chapter 4, pp.84-90 (“Imitation”) in Strategy

13. 3/9 Intangibles Geography

MODULE 4: Attacking Incumbents

14. 3/11 Judo Strategy Spring Break 15. 3/23 CASE: EASYJET

16. 3/25 Judo Strategy contd. Incumbency & Irrationality

Brandenburger-Nalebuff, “Inside Intel,” pp.280-284 in Strategy Ghemawat, Chapter 4, pp.90-95 (“Substitution”) in Strategy

17. 3/30 Project Presentations #2 Submit Set #2 of Project Slides 18. 4/1 CASE: COLA WARS

MODULE 5: Coordinating Across Businesses

19. 4/6 Portfolios of Businesses Three Pillars of Multibusiness Strategy

Ghemawat, Chapter 1, pp.8-15 (“The Rise of Strategy Consultants” and “Emerging Problems”) in Strategy

20. 4/8 Three Pillars contd. Ghemawat, Chapter 4, pp.95-101 (“Holdup”) in Strategy

21. 4/13 CASE: NEWELL

22. 4/15 CASE: 3M Limits of Organization

23. 4/20 CASE: DAIMLER-BENZ 24. 4/22 Project Presentations #3 Submit Set #3 of Project Slides 25. 4/27 CASE: DISNEY 26. 4/29 Course Wind-up 7. Assignments For each session, please do the reading indicated in the table above. Also, please bring a copy of my slides for that day (they will have been posted on Blackboard) so that you can make notes on them during class. After each session please go over your own notes, and come to the next session with any comments or questions you have. The assignments for the cases are listed below. Intel Corporation: 1968-1997 Assignment Please prepare the following questions:

• How did Intel become the dominant player in microprocessors (and, along with Microsoft, one of the two dominant players in the whole PC business)?

• What is the strategic position of the ‘clones’ (such as AMD) vis-à-vis Intel?

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• What does a SWOT analysis of AMD indicate? What strategies are open to AMD? Please submit your team write-up as a set of powerpoint slides—no more than 5 in total. (You may use the notes function to expand on some of your slides—but at most one short paragraph per slide, please!) You should also feel free to use the Internet to find out additional information about the companies in the case. Wal*Mart Stores, Inc. Assignment Please prepare the following questions:

• A number of discounters emerged in the 1950s. What was different about Walton’s idea? • What stopped others from imitating his idea? • How did Wal*Mart compete in suburban and urban markets? • Why did Wal*Mart develop such expertise in logistics? • Is Wal*Mart’s relationship with its suppliers competitive or cooperative? • Does Wal*Mart today faces limits to growth?

easyJet: The Web’s Favorite Airline Assignment Please prepare the following questions:

• Is easyJet playing judo against the flag carriers such as British Airways (BA)? If so, what specific judo strategy?

• What do the value spreads for easyJet and BA look like? Who has added value? • What, if anything, stops BA from imitating easyJet? • What are the common features of other businesses—internet access, car rentals, online

financial services, movies—that Stelios is entering? Cola Wars Continue: Coke and Pepsi in the Twenty-First Century Assignment Please prepare the following questions:

• What was the guiding principle behind Coke’s early moves—in the early to mid-twentieth century—to develop its business?

• What strategy did Pepsi use in its early days to gain ground against Coke? • In the Cola Wars since the Pepsi Challenge, who have been the winners and who have

been the losers? • In the U.S., Pepsi was able historically to make large inroads against Coke. Why is this

proving harder for Pepsi in international markets? Newell Company: Corporate Strategy Assignment Please prepare the following questions:

• How does Newell make money selling staple products to the powerful Wal*Mart? • How has it managed to be a successful acquirer (when many companies aren’t)? • What threats does Newell face at the time of the case? • How do the Calphalon and Rubbermaid acquisitions fit with, or amend, Newell’s

historical strategy? 3M: Profile of an Innovating Company Assignment Please prepare the following questions:

• How does 3M try to ensure that knowledge is shared among its different businesses?

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• How does 3M encourage the creation of new knowledge? • How can we characterize the different eras at 3M in terms of centralization vs.

decentralization? What are the pros and cons of each form of organization? Daimler-Benz A.G.: Negotiations between Daimler and Chrysler Assignment Please prepare the following questions:

• What was each company’s profile at the time of the merger? • What does the case say are the requirements for competing successfully in the car

business today? • What is the logic behind these requirements? Do you think they are, in fact, necessary? • What problems could reasonably have been foreseen with the Daimler-Chrysler merger? • What can we learn about the realization of “synergy” from mergers? • What could Daimler and Chrysler have done differently?

The Walt Disney Company: The Entertainment King Assignment Please prepare the following questions:

• Eisner was able to double sales and quintuple net income within three years of arriving at Disney. How did he do it?

• What was Eisner’s longer-term strategy? How did it differ from Disney’s historical strategy?

8. Course Project For the course-long project, each team should select an organization which is of interest to team members. Some tips on making a good choice: You could choose a well-known organization—but, perhaps, you think the conventional wisdom on it doesn’t tell the whole story. Or, you might find a ‘hidden gem’—a less well-known organization that is following a very interesting strategy. Some element of puzzle or surprise can definitely help make the project more exciting. You might decide that you want to look at the organization going forward, and make some recommendations. But it is equally okay if you want to look at the history of the organization, and use the ideas of the course to explain its successes or failures to date. Most important, take your time to select a subject that is substantial enough to support a course-long effort. Project Description The goal of the project is a strategic analysis of the chosen organization. The analysis should have five parts:

1. Description of the business landscape in which the organization operates 2. Assessment of the organization’s competitive position in that landscape 3. Defensive strategies for the organization 4. Offensive strategies for the organization 5. Multibusiness strategies for the organization, and overall summary

These five parts correspond to the five modules of the course. Specifically:

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1. For part 1 you’ll want to use ideas from the module, Mapping the Business Landscape: Value Creation, The Value Net, The Five Forces, SWOT

2. For part 2, you’ll want to use ideas from the module, Adding Value: Added Value, Value Spreads

3. For part 3, you’ll want to use ideas from the module, Defending Against Imitation: Experience, Scale, & Scope, Increasing Returns, Intangibles, Geography

4. For part 4, you’ll want to use ideas from the module, Attacking Incumbents: Judo Strategy, Incumbency & Irrationality

5. For part 5, you’ll want to use ideas from the module, Coordinating Across Businesses: Portfolios of Businesses, Three Pillars of Multibusiness Strategy, Limits of Organization

For each part of the project, you should use the course concepts as precisely as you can. But please don’t use them mechanically. Make the concepts serve your analysis, not vice versa. Also, you don’t have to use every idea from every part of the course. Indeed, this is unlikely to make for a successful project. Use your judgment as to which concepts are relevant to your question (and which are not). Project Deliverables All deliverables must be in powerpoint. (You may use the notes function to expand on some of your slides—but at most one short paragraph per slide.) The deliverables for the project are as follows:

• One slide describing the organization to be studied by the team, and also the issues the team expects its strategic analysis will illuminate—to be emailed by class on 2/5

• Six slides covering parts 1 and 2 of the project—to be emailed by class on 2/26 • Six slides covering parts 3 and 4 of the project—to be emailed by class on 3/30 • Four slides covering part 5 of the project—to be emailed by class on 4/22

Project Presentations There are three class sessions devoted to project presentations. On 2/26, approx. four teams will present their slides on parts 1 and 2. On 3/30, approx four teams will present their slides on parts 3 and 4. On 4/22, approx. four teams will present their slides on part 5. Each team will present once, and I will notify teams shortly before the date they are to present. strategy-syllabus-01-05-04