What is Strategy

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1 Welcome to Business Policy & Admin Business Policy & Admin MGS 5010 Dr. Joseph McGill Kean U - Willis 403E 908 737 4166 (O) [email protected] turbo.kean.edu/~jmcgill
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Transcript of What is Strategy

  • 1. Welcome to Business Policy & Admin MGS 5010 Dr. Joseph McGill Kean U - Willis 403E 908 737 4166 (O) [email_address] turbo.kean.edu/~jmcgill

2.

  • Firm-level view
    • Integrative - crosses internal functions/units
    • Fit the firm in its environment
    • LT performance
    • LT (~irreversible) resource commitments

Business Strategy 3. Business Strategy antecedents

  • Ancient Greece - military term: thearmys leader
  • von Clausewitz strategy isemergent
  • Strategy appears in both business and military fields in mid-19th century America.
  • West Point graduates implemented what they learned:
    • in the Civil War (developed the Staff Office)
    • in business in the 1850s

4.

    • Why is it that some firms perform well over time relative to competitors, while other firms fail?
    • Who are the stakeholders relative to firm performance (e.g., managers, owners, investors, employees, customers, suppliers, )?
    • Whatdrivesbusinessperformance ( value creation )?
  • We will learn to apply strategic management toolkitsto identify issues, evaluate alternatives, and choose & implement actions.

Business Strategy questions 5. Business Strategy

  • 1959 Ford foundation report on business schools > reform the curriculum!
  • Apply analytical models, e.g., game theory.
  • Move beyond neoclassical economics

6. 7. The Facts

  • Analysis of 8,000 US businesses 81-97:
  • 19%sustainedhigh performers.
  • 20%chronicunder-performers.
  • 41% steady moderate performers.
  • 10%decliningperformers.
  • 10%improvingperformers.
      • McGahan,California management review, 1999
  • NB Recent McKinsey research notes that sustainable success is now rarer than 20%.

8. Industry profitability 1987-1996Source: Hawawini, Subramanian, & Verdin. Strategic Management Journal (2003) 9. Why are there performance differences among firms?

  • Concentration of market power, monopoly positions ? (Bain)
  • Opportunistic innovation? (Schumpeter)
  • Efficiency through vertical integration?
  • Efficiency through control of transaction costs? (Williamson)
  • Capability to learn & adapt continuously

10. Drivers of performance (brief version)

  • Desire- some firms seek dominance (e.g. Newscorp, WalMart, Canon, Dell, Sony)
    • National competition - firms may be protected from the forces of competition(national champions for example)
  • Ability
    • To identify a valuable opportunity.
    • To innovate & protect the innovation (others see it and are attracted by first mover success).
    • To leverage firm-specific capabilities and resources.

11. 12. Alaska Gold Mine (You have14days) 13. Alaska Gold Mine (You have14days) 14. Alaska Gold Mine (You have14days) 15. Alaska Gold Mine (You have14days) 16. Alaska Gold Mine (You have14days) #3 (valley) 14 days 21 days Maybe $$$s None #4 (wait 3 days) 10-13 days to top 17-24 days to valley Yes, if top Lose, if storm None 17. The Alaska Gold Mine (You have14days) (wait 3 days) to top to valley Lose, if storm None #5 What if walk for 3 days? IF STORM Keep walking, same as option #3 IF NO STORM Turn back (total 6 days) + over top (7-10 days) 13 - 16 days 18. The Environment - Threats & Opportunities Managements values & attitude toward risk Organizations capabilities - Strengths & Weaknesses STRATEGY GOAL Strategy Formulation 19. The Environment - Threats & Opportunities Managements values & attitude toward risk Organizations capabilities - Strengths & Weaknesses STRATEGY GOAL Strategic Management Process Performance Execution/ Implementation Control Feedback Communication Monitor & Measure Formulation Implementation 20. More specifically Strategyconsists of organization-widecommitmentsandactionsrequired for a firm to exploit its competencies, gaincompetitive advantage , and earnabove-average returns *commitments - long term (irreversible) commitments *actions - involving substantial creation, acquisition, or redeployment of resources *competitive advantage(s) competitors are unable to copy/imitate 21. Terms Returns equal to those an investor expects to earn from other investments with a similar amount of risk Average(or accounting) returns Returns from firm-specific strategies that competitors are not simultaneously implementing Above-Average(or economic) returns 22. Limited sources of value creation

  • Strategies
  • Structures/business models
  • Products/processes
  • Resource/capability creation
  • Resource/capability combination
  • New markets
  • But good business ideas are hard to find!

23. Competitive Landscape Fundamental nature of competition is changingHypercompetition Dynamics of strategic maneuvering among global and innovative combatants Price-quality positioning, new know-how, first mover Protect or invade established product or geographic markets 24. Competitive Landscape Fundamental nature of competition is changingHypercompetitive environments Emergence of global economy Goods, services, people, skills, and ideas move freely across geographic borders. Spread of economic innovations around the world. Political and cultural adjustments are required. 25. Competitive Landscape Fundamental nature of competition is changingHypercompetitive environments Emergence of global economy Rapid technological change Increasing rate of technological change and diffusion The information age Increasing knowledge intensity 26. Strategic flexibility? How can a firm developdynamiccapabilitiesin response to perpetually turbulentand uncertain competitive environments? Canfirms change? (i.e., success breeds failure ) ? 27. Strategic Flexibility Strategic Flexibility Strategic Flexibility Strategic flexibility Strategic reorientation Capacity to learn Organizational slack 28. I/O Model of Above-Average Returns 1. Strategy dictated by the external environments of the firm (what opportunities exist in these environments?) 2. Firm develops internal skills required by external environment (what can the firm do about the opportunities?) 1. External Environments Industry Environment Competitor Environment General Environment Global Technological Economic Sociocultural Political/Legal Demographic 29. Four Assumptions of the I/O Model

  • 1.External environment creates pressures and constraints that determine the strategies that would result in above-average returns (deterministic)
  • 2.Most firms competing within a particularsegment are assumed to control similar strategically relevant resources and to pursue similar strategies in light of those resources

30. Four Assumptions of the I/O Model

  • 3.Resources used to implement strategies are highly mobile across firms
  • 4.Organizational decision makers are assumed to be rational and committed to acting in the firms best interests, as shown by their profit-maximizing behaviors

31. Industrial Organization Model I/O Model of Above-Average Returns

  • 1. Study the external environment, especially the industry environment
    • economies of scale
    • barriers to market entry
    • diversification
    • product differentiation
    • degree of concentration of firms in the industry

The External Environment 32. I/O Model of Above-Average Returns 2. Locate an attractive industry with a high potential for above-average returns Attractive industry: one whose structural characteristics suggest above-average returns Industrial Organization Model The External Environment An Attractive Industry 33. I/O Model of Above-Average Returns 3. Identify the strategy called for by the attractive industry to earn above-average returns Strategy formulation: selection of a strategy linked with above-average returns in a particular industry Industrial Organization Model The External Environment An Attractive Industry Strategy Formulation 34. I/O Model of Above-Average Returns 4. Develop or acquire assets and skills needed to implement the strategy Assets and skills: those assets and skills required to implement a chosen strategy Industrial Organization Model The External Environment An Attractive Industry Strategy Formulation Assets and Skills 35. I/O Model ofAbove-AverageReturns 5. Use the firms strengths (its developed or acquired assets and skills) to implement the strategy Strategy implementation: select strategic actions linked with effective implementation of the chosen strategy Industrial Organization Model The External Environment An Attractive Industry Strategy Formulation Assets and Skills Strategy Implementation 36. I/O Model of Above-Average Returns Industrial Organization Model Superior returns: earning of above-average returns The External Environment An Attractive Industry Strategy Formulation Assets and Skills Strategy Implementation Superior Returns 37. Resource-based Model of Above Average Returns 1.Strategy dictated by unique resources and capabilities of the firm (what can the firm do best?) 2.Find an environment in which to exploit these assets (where are the best opportunities?) 1. Firms Resources The Firm 38. 1. Identify the firms resources-- strengths and weaknesses compared with competitors Resources: assets (tangible or intangible) used in delivering products or services Resource-based ProcessResource-basedModel Resources 39. 2. Determine the firms capabilities--what it can do better than its competitors Capability: how resources are managed and integrated in the delivery of a product or service Resource-based ProcessResource-basedModel Resources Capability 40. Four Attributes of Resources and Capabilities (Competitive Advantage) the firm is organized appropriately to obtain the full benefits of the resources in order to realize a competitive advantageValuable allow the firm to exploit opportunities or neutralize threats in its external environment Rare possessed by few, if any, current and potential competitors Costly to imitate when other firms cannot obtain them or must obtain them at a much higher cost Nonsubstitutable Resources and Capabilities 41. Resources and capabilitiesthat meet these four criteria become a source of: Core Competencies Valuable Rare Costly to imitate Nonsubstitutable Core Competencies Resources and Capabilities 42. Core Competenciesare the basis for a firms Competitive advantage Strategic competitiveness Ability to earn above-average returns Core Competencies 43. 3. Determine the potential of the firms resources and capabilities in terms of a competitive advantage Competitive advantage: ability of a firm to outperform its rivals in the creation of value. Resource-based ProcessResource-basedModel Resources Capability Competitive Advantage 44. 4. Locate an attractive industry An attractive industry is one with opportunities that can be uniquely exploited by the firms resources and capabilities Resource-based Process Resource-basedModel Resources Capability Competitive Advantage An Attractive Industry 45. 5. Select a strategy that best allows the firm to utilizeresources and capabilities (that are superior to its rivals) relative to opportunities in the external environment Strategy formulation and implementation: strategic actions taken to earn above average returns Resource-based ProcessResource-basedModel Resources Capability Competitive Advantage An Attractive Industry Strategy Form/Impl 46. Resource-based Model of Above Average Returns Resource-basedModel Superior returns: earning of above-average returns Resources Capability Competitive Advantage An Attractive Industry Strategy Form/Impl Superior Returns 47. Strategic Intent

    • The resources requiredto realize the strategy may not be available initially
    • Intent is about seeing the end state anddeciding how to leverage internal resources, capabilities, and core competencies in a staged approach

48. The Firm and Its Stakeholders Groups who are affected by a firms performance and who have claims on its wealth The firm must maintain performance at an adequate level in order to retain the participation of key stakeholders Stakeholders THE FIRM 49. Critical dependency: Stakeholders Capital Markets

  • Shareholders (institutional ownership most active)
  • Major suppliers of capital
    • Banks
    • Private lenders
    • Venture capitalists

Stakeholders Provide Resources 50. Capital Markets Product Markets Primary customers Suppliers Host communities & regulatory bodies Unions Stakeholders Provide Resources 51. Capital Markets Product Markets Organizational Employees Managers Nonmanagers Stakeholders Provide Resources 52. Stakeholder Involvement Two issues affect the extent of stakeholder involvement in the firm How do you divide the returns to keep stakeholders involved? E.g., Compensate employees? Increase dividends? Increase product value? 1 Capital Market Product Market Organizational 53. Stakeholder Involvement Two issues affect the extent of stakeholder involvement in the firm How do you increase the returns so everyone has more to share? 2 Capital Market Product Market Organizational 54. Some financial metrics P rofitability: important to Shareholders and Senior Managers Shareholders:ROE - return on equity Dividend Yield Senior Mgrs: ROA - return on assets Expense Ratios ROS - return on sales Profit Margin L iquidity: Impt to Lenders Current Ratio Debt/Equity Ratio Quick Ratio E fficiency: Internal Usage Accounts Receivable Turnover Inventory Turns 55. Cases

  • Describe actual situations
    • Forces you tochooseamong different options and plan implementationactions
  • Cases include background events and supporting materials
    • Financial statements
    • Operational data
    • Product lists
    • Transcripts of interviews with employees

56. Case Skills

  • Evaluate
    • multiple aspects of a business situation
    • differentiate significant factors
    • deal with uncertainty, missing information
  • Envision
    • explanations not readily apparent
    • outcomes of decisions
  • Integrate/Synthesize
    • understand firm-level effects
    • interdependencies

57. Case Analysis

  • Put yourself inside the case
    • Strategic decision maker
    • Board member
    • Outside consultant
  • Purpose is to diagnose problems and find solutions. Unravel the case material.
    • Background/Problem Statement 10-20%
    • Strategic Analysis/Options 60-75 %
    • Recommendations/Action Plan 10-20%