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THINKING STRATEGICALLY:
THINKING STRATEGICALLY:
The Concept of Strategy and the Pursuit of Sustained Superior Profits
Business PropositionBusiness Proposition
Profits = Quantity (Revenue - Cost)
3 most fundamental variables in Business
MARGIN
Domain of Strategy Domain of Strategy
• strategic competitiveness and above normal returns• concerns managerial decisions and actions which
materially affect the success and survival of business enterprises
• involves the judgment necessary to strategically position a business and its resources so as to maximize long-term profits in the face of irreducible uncertainty and aggressive competition
• strategy is the linkage between a business and its current and future environment
Key Characteristics of Strategic DecisionsKey Characteristics of Strategic Decisions
What makes a decision strategic?• decision-making in the face of irreducible uncertainty• requires irreversible commitments...involves allocation
of sunk investments ($, time, tangible & intangible resources)
• requires choice and trade-offs• multi-functional in scope/consequences• entrepreneurial theorizing/future oriented• infrequent and non-recurring• dealing with competition• concerning the external environment... primarily
product/market choices
DefinitionsDefinitions
• The determination of the long run goals and objectives of an enterprise, and the adoption of courses of action and the allocation of resources necessary for carrying out these goals
• Alfred Chandler, Strategy and Structure
Distinguishing Strategy from TacticsDistinguishing Strategy from Tactics
• Strategy is the overall plan for deploying resources to establish a favorable position
• Tactic is a scheme for a specific maneuver
Common Elements in Successful Strategy
Successful Strategy
Profound understanding of the competitive environment
Objective appraisal of resources
Long-term, simple and agreed uponobjectives
$
EFFECTIVE IMPLEMENTATION
Source: Adapted from Robert S. Grant, 1991
Concepts of Firm PerformanceConcepts of Firm Performance
• firm survival• accounting profits (ROA, ROE, ROS)
• surplus of revenues over expenses
• economic profit/rent (economic value added, positive NPV)
• normal return on capital • abnormal return - surplus after all inputs
• shareholder value/market value…(EVA, Tobin’s q)
• Change in market value over time
Above Normal Profits
(in Excess of the Competitive Level)
AvoidCompetitors
Be Better ThanCompetition
AttractiveIndustry
AttractiveNiche Cost
AdvantageDifferentiation
Advantage
AttractiveStrategic
Group
Entry Barriers
Mobility Barriers
Isolating Mechanisms
Sources of Superior PerformanceSources of Superior Performance
Elements of a StrategyElements of a Strategy
1. BUSINESS DEFINITION
Customer Needs
Technology
Products
Geographic Scope
2. BUSINESS STRATEGIC INTENT
Direction
Rate
Priorities
Elements of a StrategyElements of a Strategy
3. FINANCIAL TARGETSShort-term Long-term
ROAROEROS
4. SOURCES OF COMPETITIVE ADVANTAGEReputation and Consumer LoyaltyBrand nameProducer LearningEconomies of Scale and/or ScopeLocationAccess to lower cost factors of productionDistribution and Shelf-spaceetc.
Elements of a StrategyElements of a Strategy
5. KEY STRATEGIC DIMENSIONS Product line Specialization
Brand IdentificationPush vs Pull MarketingSelling ApproachDistribution and Channel SelectionProduct QualityTechnological leadershipVertical IntegrationCost PositionCustomer ServicePrice PolicyFinancial LeverageRelationship with Parent Company, if any
Elements of a Strategy
6. VALUE-ADDING ACTIVITIES
Research
Development
Procurement
Raw Material Processing*
Intermediate Production*
Final Production*
Marketing
Selling
Distribution*
Customer Service*
* For service businesses use Production Operations, Support Operations, and Delivery Operations instead.
Elements of a StrategyElements of a Strategy
7. COMPETITIVE STRATEGY Competitor A Competitor B Competitor C Competitor D
etc.
Levels of StrategyLevels of Strategy
• Corporate strategy... defines the scope of the business in terms of the industries and markets in which it competes.• includes decisions about diversification, vertical integration,
acquisitions, new ventures, divestments, allocation of scarce resources between business units
• Business strategy... is concerned with how the firm competes within a particular industry or market... to win a business unit must adopt a strategy that establishes a competitive advantage over its rivals.
• Functional strategy... the detailed deployment of resources at the operational level
Levels of Strategy
Division A
R & D Personnel Finance Production Marketing/Sales
Division B
R & D Personnel Finance Production Marketing/Sales
Source: Robert M. Grant, Contemporary Strategy Analysis, Basil Blackwell, 1991.
FUNCTIONALSTRATEGIES
BUSINESSSTRATEGY
CORPORATESTRATEGY
CORPORATEHEAD OFFICE