Economic Economic Foundations of Foundations of StrategyStrategy

Power Point Set #2

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The Wisdom of Choice:The Wisdom of Choice:

“To try and fail is at least to learn; to fail to try is to suffer the inestimable loss of what might have been.”

– Chester Barnard, The Functions of the Executive

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What Is Strategic Management About?What Is Strategic Management About?

Understanding how firms create, capture, and sustain competitive advantage.

Analyzing strategic business situations and formulating strategic plans.

Implementing strategy and organizing the firm for strategic success.

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What Is Strategic Management About?

Sustainable competitive advantage occurs when a firm implements an economic value-creating strategy of which other companies are unable to duplicate the benefits or find it too costly to imitate.

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The Evolution of Strategic ManagementThe Evolution of Strategic Management

DOMINANTTHEME

MAINISSUES

CONCEPTS&

TECHNIQUES

IMPLEMENT-ATION

1950s 1960s Early-mid Late1970s Late 1980s Late 1990s1970s early 1980s early 1990s early 2000s

Budgetary Corporate Corporate Analysis of Quest for Strategicplanning & planning strategy industry & competitive innovationcontrol competition advantage The “New

Economy”Financial control Planning growth Diversifica- Positioning Competitive Innovation &

ion advantage knowledge

Budgeting Forecasting & Portfolio Analysis of Resource Dynamic project appraisal investment planning. industry & analysis. sources of

planning Synergy competition Case advantagemarket competences Knowledgeshare management

cooperation

Emphasis on Rise of Diversifi- Industry/market Restructuring Virtual orga-financial corporate planning cation. selectivity. BPR. nization.management departments Quest for Active asset Refocusing Alliances

& formal global management Outsourcing Quest forplanning market share critical mass

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The Basic FrameworkStrategy: the Link between the

Firm and its Environment

The Basic FrameworkStrategy: the Link between the

Firm and its Environment

THE FIRM

Goals & Values

Resources &Capabilities

Structure & Systems

THE INDUSTRYENVIRONMENT

CompetitorsCustomersSuppliers

STRATEGYSTRATEGY

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The Role of Strategy In Business is to Generate and Sustain Value The Role of Strategy In Business is to Generate and Sustain Value via the Linkages Between Position, Resources, and Organizationvia the Linkages Between Position, Resources, and Organization

Position

Resources& Capabilities Organization

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PositioningPositioning

Scope of the Firm:

Geographic Scope

Choice of businesses (corporate portfolio analysis)

Product Market Positioning within a business

Vertical integration decisions

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ResourcesResources

Tangible Resourcese.g., physical capital

Intangible Resourcese.g., trademarks, “know-how”

Organizational Capabilitiese.g., routines and standard operating procedures

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OrganizationOrganization

StructureFormal Definition of authorityConflict Resolution

SystemsRules, Routines, Evaluation and rewards

ProcessesInformal communication, networks, recruitment

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A Definition of StrategyA Definition of Strategy

Strategy (Quinn, 1980):

“The pattern or plan that integrates an organization’s major goals, policies, and action sequences into a cohesive whole. A well formulated strategy helps to marshal and allocate an organization’s resources into a unique and viable posture based on its relative internal competencies and shortcomings, anticipated changes in the environment , and contingent moves by intelligent opponents.”

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Definitions of StrategyDefinitions of Strategy“The term “strategy” is intended to focus on the inter-dependence of the adversaries’ decisions and on their expectations about each other’s behavior.”

– Thomas Schelling The Strategy of Conflict

“Strategy can be defined as the determination of the basic long-term goals and objectives of an enterprise, and the adoption of courses of action and the allocation of resources necessary for carrying out those goals.”

– Alfred D. Chandler Strategy and Structure

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Abell’s Framework for Defining the Business

Who is beingsatisfied?

Customer Groups

What is beingsatisfied?

Customer Needs

How arecustomer needs

satisfied?Distinctive

Competencies

Definitionof Business

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Defining the Business: Defining the Business: The Starting PointThe Starting Point of Strategy of Strategy

Example: Fall of the Railroads

“They let others take customers away from them because they assumed themselves to be in the railroad business rather than in the transportation business. The reason they defined their industry wrong was because they were railroad oriented instead of transport oriented; they were product oriented instead of customer oriented.”

– Theodore Levitt “Market Myopia”

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Mission Statement and GoalsMission Statement and GoalsIt is the function of the top management team to provide the firm’s purpose or “strategic intent.”

– Chester Barnard The Functions of the Executive

– Alfred Sloan My Years with General Motors

Komatsu ---> “Encircle Caterpillar”Canon ---> “Beat Xerox”Kodak ---> “Be the leader in the imaging sector”Coca Cola ---> “To put a Coke within ‘arms reach’ of every consumer in the world.”

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Fundamental question of the choice of Goals: Planning for what purpose(s)?

Profitability (net profits)Efficiency (low costs)Market ShareGrowth (e.g., increase in total assets, sales, etc)Shareholder Wealth (dividends plus stock price appreciation)Utilization of Resources (e.g., ROE, ROI)ReputationContribution to Stakeholders (e.g., employees, society)Survival (avoid bankruptcy)

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The Manager’s role in balancing expectations

Business Roundtable:“Balancing the shareholder’s expectations of maximum return against other priorities is one of the fundamental problems confronting corporate management.”

Understanding corporate strategy means understanding the competing value claims of multiple stakeholders.

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The Manager’s role in balancing expectationsThe Manager’s role in balancing expectations

Stakeholders are the individuals and groups who can affect, and are affected by, the strategic outcomes achieved and who have enforceable claims on a firm’s performance.

19Copyright © 2001 Houghton Mifflin Company. All rights reserved. 2-2

FIGURE 2.1

Stakeholders and the EnterpriseStakeholders and the Enterprise

Contributions

Contributions

Inducements

Inducements

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AA Key Performance Measure:Key Performance Measure:Sustainable Competitive AdvantageSustainable Competitive Advantage

For a company, the definition of success is superior economic performance.

To achieve superior economic performance, a firm has to create a sustainable competitive advantage (SCA).

SCA is achieved by a value-creating strategy that cannot be (easily) duplicated.

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Key Drivers of Value Creation and Key Drivers of Value Creation and Sustainable Competitive Advantage:Sustainable Competitive Advantage:

Generating economic value can be accomplished through:

REVENUE drivers

COST drivers

RISK drivers

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Sources of Superior Profitability

RATE OF PROFIT ABOVE THE

COMPETITIVE LEVEL

How do we make

money?

INDUSTRY

ATTRACTIVENESS

Which businesses

should we be in?

COMPETITIVE ADVANTAGE

How should we compete?

CORPORATE STRATEGY

BUSINESS STRATEGY

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The Levels of StrategyThe Levels of Strategy

R&D

HR

Finance

Production

M ktg/Sales

D ivision A

R&D

HR

Finance

Production

M ktg/Sales

D ivision B

R&D

HR

Finance

Production

M ktg/Sales

D ivision C

C orpo rateH eadquarte rs

Corporate - General Electric

Business - Home Appliances

Functional - e.g., Production

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Corporate StrategyCorporate Strategy

At the corporate level, value creation can occur if the individual parts of a firm are integrated into a coherent whole.

Corporate strategy is the way a company creates value through the configuration and coordination of its multi-market activities.

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O u r L e a r n i n g G o a l s : P u s h i n g D o w n T h r o u g h B l o o m ’ s T a x o n o m yO u r L e a r n i n g G o a l s : P u s h i n g D o w n T h r o u g h B l o o m ’ s T a x o n o m y

1 . K n o w l e d g e : r e m e m b e r m a t e r i a l ; k n o w t e r m s , f a c t s , p r o c e d u r e s , b a s i c c o n c e p t s

2 . C o m p r e h e n s i o n : g r a s p m e a n i n g ; u n d e r s t a n d f a c t s , i n t e r p r e t c h a r t s , t r a n s l a t e v e r b a l t o m a t h e s t i m a t e c o n s e q u e n c e s

3 . A p p l i c a t i o n : u s e m a t e r i a l i n n e w s i t u a t i o n s ; a p p l y c o n c e p t s t o r e a l s i t u a t i o n s , f o l l o w a p r o c e d u r e

1 . K n o w l e d g e : r e m e m b e r m a t e r i a l ; k n o w t e r m s , f a c t s , p r o c e d u r e s , b a s i c c o n c e p t s

2 . C o m p r e h e n s i o n : g r a s p m e a n i n g ; u n d e r s t a n d f a c t s , i n t e r p r e t c h a r t s , t r a n s l a t e v e r b a l t o m a t h e s t i m a t e c o n s e q u e n c e s

3 . A p p l i c a t i o n : u s e m a t e r i a l i n n e w s i t u a t i o n s ; a p p l y c o n c e p t s t o r e a l s i t u a t i o n s , f o l l o w a p r o c e d u r e

4 . A n a l y s i s : b r e a k m a t e r i a l i n t o c o m p o n e n t s & u n d e r s t a n d s t r u c t u r e ; r e c o g n i z e l o g i c a l f a l l a c i e s , d i s t i n g u i s h f a c t a n d i n f e r e n c e , e v a l u a t e r e l e v a n c y o f d a t a

5 . S y n t h e s i s : i n t e g r a t e p a r t s t o m a k e a n e w w h o l e , i n t e g r a t e l e a r n i n g t o s o l v e a p r o b l e m

6 . E v a l u a t i o n s : j u d g e l o g i c a l c o n s i s t e n c y , j u d g e w h e t h e r c o n c l u s i o n s a r e s u p p o r t e d b y f a c t s

4 . A n a l y s i s : b r e a k m a t e r i a l i n t o c o m p o n e n t s & u n d e r s t a n d s t r u c t u r e ; r e c o g n i z e l o g i c a l f a l l a c i e s , d i s t i n g u i s h f a c t a n d i n f e r e n c e , e v a l u a t e r e l e v a n c y o f d a t a

5 . S y n t h e s i s : i n t e g r a t e p a r t s t o m a k e a n e w w h o l e , i n t e g r a t e l e a r n i n g t o s o l v e a p r o b l e m

6 . E v a l u a t i o n s : j u d g e l o g i c a l c o n s i s t e n c y , j u d g e w h e t h e r c o n c l u s i o n s a r e s u p p o r t e d b y f a c t s

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Summary “Take-aways”:Providing PURPOSE is an important function for the executive.

One important purpose is to CREATE VALUE.

Value creation can lead to SUSTAINABLE COMPETITIVE ADVANTAGE.