Week 1
STRATEGY: WHY AND WHAT
MGMT102 Strategy
MGMT102 Strategy, AY2324 T2
Liang Chen, Associate Professor of Strategy & Entrepreneurship
MGMT102 Strategy
Today’s Agenda
•Introduction
▪ To you and
me…
▪ To this subject
–Structure
–Administration
–Assessment
▪ Why Strategy?
▪ To Strategic
Management
Who am I
Liang CHEN
▪Asso Prof
▪Taught in UK, Australia, &
China/HK
▪Research digital strategy and
internationalization
▪Email: liangchen@smu.edu.sg
▪Teaching cases
The Essentials
•Recommended Textbook
▪ Strategic Management (6th Edition, 2024) by Frank Rothaermel
•Coursepack
▪ https://hbsp.harvard.edu/import/1129244
Assessment
(1) Class participation
(2) Group project
(3) Group presentation
(4) Take-home assignment
(5) Final exam
20% individual
15% assigned group
20% assigned group
10% individual
35% individual
Group Project
• The instructor will form groups during the term capturing the
diversity of the class. All groups in all sections of this course regardless of who the instructor is - will be formed by the instructor
and not by students themselves. You will analyze one company in your
assigned groups of five students. I will decide the case company at a later
date and give you some inspirations to start with.
• Due Week 8
Group Presentation
• Identify a company that is comparable to the case company you analyzed
for your Group Project (e.g., regarding its industry, market positioning, core
competence, resources and capabilities, business model, etc). Each group
will be given 20 minutes to present, followed by Q&A.
• Due Week 11
Take Home Assignment
• Answer 3 questions after reading the Dropbox case (in the coursepack)
• Due Week 14
Participation
Work through case study (and materials) before
class. Take notes, address the questions, come
prepared, and share your thoughts.
Be curious. Be confident. Be inquisitive. Be
respectful of others.
- Transparency
- High correlation b/w engagement and grade
What is Strategy?
• What comes to mind when you hear “strategy”?
Origins of Strategy
• Military domain
–στρατηγός
(strategos) “leader or commander of an army”
• Business context
–2nd
industrial revolution – strategy as a way to shape market forces
• Railway
• Improved access to capital
• Need for explicit strategic thinking first articulated by high-level
managers, e.g. Alfred P. Sloan, GM CEO (1923-1946)
Why Strategy?
Why Strategy?
▪ $211.85B market cap
▪ $18.12B revenue (Q3 2023)
Why Strategy?
Highest performing stock in
S&P500 for 2023
▪ $1223.19B market cap
▪ $14.2B revenue (Q3 2023)
Industry, Firm, and Other Effects Explaining Superior Firm
Performance
Strategy as a Theory of How to Compete to Create
Superior Value, While Containing the Cost to Create It
The greater the difference between the value creation and cost, the
greater the firm’s economic contribution and the more likely it will achieve
sustainable competitive advantage (SCA).
OpenAI
Microsoft
Nvidia
Only a fraction of Microsoft’s $10 billion
investment in OpenAI has been wired to
the startup, while a significant portion of
the funding, is in the form of cloud
compute purchases instead of cash.
Why Strategy?
(1) A better view of businesses
Speaking of the Age of AI…
• Technologies evolve
through periods of
incremental change
punctuated by technological
breakthroughs that either
enhance or destroy the
competences of established
companies.
iPhone?
ChatGPT?
• Competence-destroying
discontinuities will be initiated by new
entrants
• Competence-enhancing
discontinuities will be initiated by
existing firms
The Age of AI
• AI substituting or complementing human?
1.
2.
3.
4.
AI can lead to automation or augmentation.
Automation eats your job.
Augmentation makes you better at your job.
Hence, avoid automation and embrace augmentation.
• But in fact?
AI augmentation makes
high-skilled knowledge
workers relatively more
substitutable by lowering
the skill barrier to achieve
the same performance.
Well, nothing new…
• Uber/Grab vs cabbies
Commoditization of skill
cabbies lost their competitive advantage. Any maps-augmented amateur could
compete with their city navigation skills
2. Supply expansion erodes skill premium
the market of potential drivers expanded; more competition -> less ability of
drivers to charge a premium.
3.
Centralized market-making drives faster commoditization
absorbed this ‘price war’ into algorithm
4.
Centralized ‘job discovery’ reduces negotiating power
lost the ability to set the price and the agency to accept or reject work
opportunities
1.
Platforms make commoditization worse…
The Age of AI
• AI substituting or complementing human?
The Age of AI
• Ok great, AI reduces demand for human skills and experts’ pricing power.
• But when do humans perform better than AI?
• Or in strategy terms, what’s our competitive advantage?
A Thought Experiment
• Which player, White or Black, would be more likely to win a game of chess.
• GPT-4: While the chances of winning depended mostly on the skill of the players
if the players were evenly matched, the White player would have a slight
advantage over the Black player, just because the White player moves first, and
therefore has one more move and can also dictate the style and tempo of the
game.
A Thought Experiment
• Consider a cylindrical chessboard where the top
and the bottom edge connect so that by stepping
beyond the top edge, a piece would appear at the
bottom and vice versa. Which player -- assuming
other rules remain the same as in the classical
game -- would win such a game on average?
• GPT-4: the change would most likely profoundly
change the strategies available to the two players.
Players need to adapt their strategies, and White’s
opening advantage may be slightly affected by the
change. Ultimately who will win, as in the classical
game, depends on the players’ skills.
What Do We Do in the Age of AI
• A new set of skills
• What’s our competitive advantage over machines and over other
humans?
• Comparative cases
– Change vs no change
– Option 1 vs option 2
– You vs competitors
Why Strategy?
(1) A better view of businesses
(2) A better view of yourselves
Strategy in the Business Context
• What explains firm’s behaviors?
• Why firms differ?
• What explains success or failure?
• What are the sources of the competitive advantage?
Classic Views
❑‘..the determination of the long-run goals and objectives of an
enterprise and the adoption of courses of action and the allocation
of resource necessary for carrying out these goals’
Alfred Chandler
❑‘Competitive strategy is about being different. It means
deliberately choosing a different set of activities to deliver a
unique mix of value’
Michael Porter
Sources:
Chandler, A.D. (1963) “Strategy and Structure: Chapters in the History of American Enterprise”, MIT Press
Porter, M.E. (1996). “What is strategy?”, Harvard Business Review, November-December
A More Elaborate View
Definition: Strategy is the quest to create, capture, and sustain competitive
advantage.
•
It is the managers’ theories/maps about how to sustain advantage.
•
It is about deciding what to do, and what not to do
(i.e., economic tradeoffs are considered; opportunity cost).
•
It has alternatives, consequences, and choices involving significant
resources, typically made under some level of uncertainty.
•
It requires long-term commitments that are not easily reversible.
•
It is about being different from your rivals. It combines a set of activities
to stake out a unique positioning.
Unique Positioning
• The key to successful strategy: combine activities for a unique
position in an industry.
• Competitive advantage has to come from:
▪ performing
different activities, or
▪ performing
the same activities differently than rivals
• Example: Wal-mart’s strategic activities strengthen its position
as cost leader
▪ Big
stores in rural locations; regional distribution centers, IT systems
▪ High purchasing power
▪ Low
corporate overhead
▪ Low
base wages
Levels of Strategy
• Corporate Level: Typically involves decision-making by the top
management team that includes the CEO, senior executives, the board of
directors, and the corporate staff. Decisions include vertical integration,
diversification, strategic alliances, acquisitions, new ventures,
restructuring, and divestments.
• Business Level: Includes the strategic choice of generic strategy (cost
leadership, differentiation, focus) and the benefits and costs of first-mover
advantages. Often an enterprise participating in multiple businesses will
have different business strategies.
• Functional Level: Typically directed at improving the effectiveness of
functional operations within a company, such as manufacturing, materials
management, human resources, marketing, R&D, and operations
management.
Level of Strategy
In most organizations, two types of managers
•
General managers at corporate and business-levels
•
Operations managers, at operational (functional) level
• Where to compete?
• How to compete?
• How to implement?
Levels of Strategy
• Where to Compete?
• CORPORATE STRATEGY
▪ Should
GE move more aggressively
into the health care industry?
• How to Compete?
• BUSINESS STRATEGY
▪ Should
GE jet engines have better
fuel efficiency than Rolls Royce?
• How to Implement?
▪ Should
GE human resources recruit
more computer science graduates?
• FUNCTIONAL STRATEGY
Course structure
Session
1
2
3
4
5
6
7
8
Content/ topic/activity
Strategy and strategic leadership
External analysis (Case: YouTuber)
Internal analysis (Case: Alphabet)
Business strategy (Case: Amazon)
Firm performance and business model, & Guest speaker
Corporate strategy: Vertical integration and diversification (Case: Lego)
Corporate strategy: Strategic alliances and M&As (Case: Disney)
Recess
9
10
11
Stakeholders and sustainability (Case: Li-ion battery)
Global strategy (Case: Intel)
Digital strategy, & Guest speaker
12
13
14
Group presentations
Group presentations & review
Reading week
Strategic Analysis
Vision, mission, values; External Analysis; and Internal Analysis are
inputs for Strategy Formulation.
Strategy Practitioners
–Wal-mart's Sam Walton's assumptions about low costs, low prices,
and high volume to drive profitability
–Apple’s Steve Jobs wanted to “put a ding in the universe”
–Facebook’s Mark Zukerberg wanted to “make the world open and
connected”
–Google’s Larry Page and Sergio Brin wanted to make information
accessible
Mission
• Define the purpose of the organization:
▪ What
▪ Who
is our reason for being?
are we?
▪ What
is it that we do?
• Mission often includes values: the organization’s guiding principles
▪ How
we do business.
Mission: Examples
• Wal-Mart (articulated by founder Sam Walton): To give ordinary folk the
chance to buy the same things as rich people.
• 3M: To solve unsolved problems innovatively.
• Google: To organise the world’s information and make it universally accessible
and useful.
• Lego: Inspire and develop the builders of tomorrow
• Airbnb: Enable people to make new friends in different cultures
• Starbucks: Inspire and nurture the human spirit
• Pfizer: “…helping humanity and delivering exceptional financial performance by
discovering, developing and providing innovative health care products that lead
to healthier and more productive lives.”
Purpose Shapes Objectives
Type of organizations
Objectives
1. Family-owned and
managed firms
Resale value? Pension?
Legacy?
2. Publically owned,
professionally managed
Short and long-term
value
3. State-owned/backed
firms
Various objectives (i.e.
global influence, securing
of access to resources).
4. Not for profit
organizations
Various objectives set by
stakeholders
Shareholder Value as Mission?
• Maximizing long-run performance (profitability, CF, shareholder value…)
is the underlying objective of Strategic Management.
• But…
▪ …it
provides little purpose, guidance and direction to the company; neither
does profit maximisation capture the imagination of employees.
Profits are to business as breathing is to life. Breathing is essential to life, but is
not the purpose for living.
(Dennis Bakke, former CEO AES)
▪ On
the face of it, shareholder value is the dumbest idea in the world.
Shareholder value is a result, not a strategy… your main constituencies are your
employees, your customers and your products.
(Jack Welch, former CEO GE)
Values (Often Part of Mission)
•All companies have values, including those that do not spell
them out.
•Values frequently spelt out by companies:
▪ Fundamental
▪ Professional
▪ Specific
ethical values (e.g. integrity, transparency, …)
values (e.g. hard work, initiative, meritocracy,…)
commitments to particular stakeholder groups (e.g. creating a safe
working environment, safe products,…)
Merck: Reconfirming Its Core Values
• Merck
▪ Mission:
▪ Values:
“to preserve and improve human life”
“We try to never forget that medicine is for the people. It is not for
profits. The profits follow, and if we have remembered that, they have never
failed to appear” George Merck
BHP’s Charter
We value:
▪ High Performance — The excitement and fulfilment of achieving
superior business results and stretching our capabilities.
▪ Win-Win Relationships — Having relationships which focus on the
creation of value for all parties.
▪ The Courage to Lead Change — Accepting the responsibility to inspire
and deliver positive change in the face of adversity.
▪ Respect for Each Other — The embracing of diversity, enriched by
openness, sharing, trust, teamwork and involvement.
▪ Safety and the Environment — An overriding commitment to health,
safety, environmental responsibility and sustainable development.
▪ Integrity — Including doing what we say we will do.
Values: Johnson & Johnson
Mission (and Values) as Window-dressing
“Take your pick”:
• We are a
▪ premier; leading; preeminent; world-class; growing
• company that provides
▪ innovative; cost-effective; focused; diversified; high quality
▪ products; services; products and services
• to
▪ serve the global market place; create shareholder value; fulfill our covenants
with stakeholders; delight our customers
• in rapidly changing
▪ information solution; business-solution; consumer-solution; financial solution
• industries.
Whose Values are These?
•We work with customers and prospects openly, honestly
and sincerely. When we say we will do something, we will
do it; when we say we cannot or will not do something,
then we won’t do it.
Vision
•
•
“The envisioned future [i.e. ‘vision’] is what we aspire to become, to
achieve, to create” (Collins & Porras 1996)
▪
What do we want to become in 10 or 20 years?
▪
What do we want to achieve over the next 10 or 20 years?
Format:
BHAG and elaborate, vivid description (Collins & Porras 1996)
Vision: BHAG
•
Compelling goal (resonates with people and focuses their attention); tangible; daunting
(achievement possible but far from assured);
“Putting a man on the moon”
(Kennedy Administration)
“Wiping out Malaria” (WHO)
“Beat Xerox” (Canon)
Vision: Example
•BHAG
• “To become the company most known for changing the worldwide poor-quality
image of Japanese products.”
•Elaborated as:
• “We will create products that become pervasive around the world.... We will be
the first Japanese company to go into the U.S. market and distribute directly.... We
will succeed with innovations that U.S. companies have failed at - such as the
transistor radio.... Fifty years from now, our brand name will be as well known as
any in the world. ..and will signify innovation and quality that rival the most
innovative companies anywhere.... "Made in Japan" will mean something fine, not
something shoddy.” (Collins & Porras 1996)
50
Summary: Statements of Mission, Vision, and
Value
What is the organization there to do that makes a difference, and to whom?
Mission statement
• “Why we exist?” “How do we make a difference”
• Information to stakeholders about overarching purpose of the firm
• Often confused with strategic objective(s)
Value statement
• “What we believe in”
Mission, vision and values
provide guidance. They impose
broad constraints on strategic
choice.
• Core principles underpinning operations
Vision statement
• “What we want to be”
• Desired future of the firm
Mission, vision and values may
also:
▪ provide inspiration and motivation
▪ act as “corporate glue”
▪ provide direction in exceptional
circumstances.
In a Dynamic and Turbulent Environment…
• “Companies that enjoy enduring success have core values and a core purpose [i.e.
‘mission’] that remain fixed while their business strategies and practices endlessly
adapt to a changing world.”
(Collins & Porras 1996 HBR: p.65)
• I.e. these companies have a mission/values that anchor them.
• “The envisioned future [i.e. ‘vision’] is what we aspire to become, to achieve, to
create something that will require significant change … Vision provides guidance …
towards what future to stimulate progress towards.”
(Collins & Porras 1996 HBR: p.66)
• I.e. their vision propels them forward; propels them in a particular direction.
Strategy Statement (For Employees)
… what is strategy, really
?
Where do we compete?
What unique values do we offer?
“The direction and scope of an organisation over the long term, which achieves advantage
in a changing environment through its configuration of resources and competences with
the aim of fulfilling stakeholder expectations”
What resources and capabilities
do we have to deliver that value?
Strategy Statement: Be Specific!
• “To grow to 17,000 financial advisers by 2012 by offering trusted and convenient face-toface financial advice to conservative individual investors who delegate their financial
decisions, through a national network of one-financial adviser offices.”
• Face-to-face – excludes certain customer segments
• “Conservative” – long-term
• “Individual” – not institutions or companies
• “Investors” – basic service is investment (not checking accounts etc.)
• “Who delegate their financial decisions” – segmentation, not interested in self-directed
customers
More room for debates, less room for miss-interpretations!
Strategic Position and Choices
Impact on strategy
How to form and
implement
Johnson et al. (2014):
Figure 1.3 The Exploring
Strategy Model
Options for strategy
Three Approaches to Strategize for Competitive Advantage
• Strategic planning
▪A
formal, top-down planning approach
• Scenario planning
▪A
formal, top-down planning approach
• Strategy as planned emergence
▪ Begins
with a strategic plan, less formal
AFI Framework for
Top-Down Strategic Planning
Shortcomings of the Top-Down Approach
• May not adapt well to change
• Formulation separate from implementation
• Information flows top-down (one-way)
• The leadership team’s future vision can be wrong
• Example of a Top-Down Approach: Apple
▪ Steve
Jobs predicted customers needs and was one of the few successful technology
companies using a top-down planning process.
A Critique of Planning, Altogether
Strategy as Scenario Planning
▪ Envision
different "what-if" plans
▪ Generates
a dominant strategic plan
–Must implement the most probable option
▪ Good
example of scenario planning
–Shell
https://hbr.org/2013/05/living-in-the-futures
Strategy as Scenario Planning
Developing Natural Gas in China
• The Scenarios team has produced a joint study with the Development
Research Centre (DRC) of China’s State Council to examine how natural gas
could evolve as a mainstream energy source in China.
• Natural gas is the ideal alternative to coal, as it is cleaner, more efficient and
easier to transport and store. But although its use globally has grown rapidly
over the last decade or two, gas has significant challenges to overcome before
it can become a core component of China’s energy system.
• The Shell-DRC study sets out a strategic aim to increase the share of gas in the
energy mix to 10% in 2020 and 15% in 2030, up from 5.8% in 2014. This
reflects the goals set out in China's Twelfth Five Year Plan and the 2016 Paris
Agreement on climate change.
• The study was a key input into China’s Thirteenth Five Year Plan.
Strategy as Planned Emergence
• Top Down and Bottom Up
▪ Bottom-up
strategic initiatives emerge
▪ Evaluated &
coordinated by management
• Relies on data, plus:
▪ Personal
experience
▪ Deep
domain expertise
▪ Front
line employee insights
Strategic Initiatives and Serendipity
• Japan Railways
▪ Constructing a
bullet train through the mountains
North of Tokyo, which required many tunnels
▪ Persistent
▪ Complex
flooding
engineering plans to drain the water
▪ Maintenance worker
suggested that the fresh water off the mountains should
not be drained, but rather should be bottled
▪ 1,000
vending machines on 1,000 railroad platforms in and around Tokyo, and
home delivery of water, juices, and coffee followed.
▪ The
employee’s proposal had turned this “bottom-up” strategy into a multimillion dollar business.
Starbuck’s Frappuccino
• Diana – Starbucks store manager in California
▪ Received
▪ Tried
requests for iced beverage
the beverage, and liked it
• Requested Starbucks HQ offer the drink
▪ Request
denied; She did it anyway
• Sales skyrocketed
▪ Was
eventually adopted by Starbucks Executives
• This is now the Starbucks Frappuccino
▪ At
one point, was 20% of Starbucks’ revenues
Thank you