What is Strategy

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Welcome to
Integrative Business Strategy
MGS 4999
Dr. Joseph McGill
Kean U - Willis 105J
908 737 4166 (O)
jmcgill@kean.edu
turbo.kean.edu/~jmcgill
1
Business Strategy
• Firm-level view
– Integrative - crosses internal functions/units
– Fit – the firm in its environment
– LT performance
– LT (~irreversible) resource commitments
2
Learning Objectives
• Understand
strategy
• Understand
• Understand
• Understand
history/context of
the goal of strategy
strategy content
strategy process
3
Business Strategy antecedents
• Ancient Greece - military term Στρατηγικός:
the army’s leader
• von Clausewitz – strategy is emergent
• 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)
4
– in business in the 1850s
Business Strategy questions
– 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, …)?
– What drives business performance (value
creation)?
• We will learn to apply strategic management
“toolkits” to identify issues, evaluate
5
alternatives, and choose & implement actions.
Business Strategy
• 1959 – Ford foundation report on
business schools > reform the
curriculum!
• Apply analytical models, e.g.,
game theory.
• Move beyond neoclassical
economics
6
Neoclassical economics
Firm
MC
AC
Price per Bushel
Price per Bushel
LONG-RUN EQUILIBRIUM - FIRM AND INDUSTRY
Industry
D
(2,075 firms)
S
2
M
m
$1.87
D
2
40
Quantity of Corn in
Thousands of Bushels
(a)
$1.87
S
2
D
83
Quantity of Corn in
Millions of Bushels
(b)
7
The Facts
Analysis of 8,000 US businesses 81-97:
• 19% sustained high performers.
• 20% chronic under-performers.
• 41% steady moderate performers.
• 10% declining performers.
• 10% improving performers.
McGahan,California management review, 1999
• NB Recent McKinsey research notes that
sustainable success is now rarer than
20%.
8
Industry
profitability
1987-1996
Source: 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 have 14 days)
Option
Min Time Max Time Outcome
Personal
Risk
#1
(wait 3-4 weeks)
#2
(over top)
#3
(valley)
#4
(wait 3 days)
13
Alaska Gold Mine
(You have 14 days)
Option
Min Time Max Time Outcome
No $$$
#1
Personal
Risk
None
(wait 3-4 weeks)
#2
(over top)
#3
(valley)
#4
(wait 3 days)
14
Alaska Gold Mine
(You have 14 days)
Option
Min Time Max Time Outcome
#1
Personal
Risk
No $$$s
None
For sure
$$$s
Life
(wait 3-4 weeks)
7 days
#2
(over top)
10 days
#3
(valley)
#4
(wait 3 days)
15
Alaska Gold Mine
(You have 14 days)
Option
Min Time Max Time Outcome
#1
Personal
Risk
No $$$s
None
For sure
$$$s
Maybe
$$$s
Life
(wait 3-4 weeks)
#2
7 days
10 days
14 days
21 days
(over top)
#3
(valley)
None
#4
(wait 3 days)
16
Alaska Gold Mine
(You have 14 days)
Option
Min Time Max Time Outcome
No $$$s None
#1
(wait 3-4 weeks)
#3
#2
Personal
Risk
(valley)
(over top)
#4
(wait 3 days)
#3
14 days
7 days
21 days
10 days
(wait 3 days)
None
Life
Yes, if top
10-13 days 17-24 days $$$s
None
Lose, if storm
to top
to valley
14 days
21 days
(valley)
#4
Maybe
For
$$$ssure
10-13 days 17-24 days
to top
to valley
Maybe
$$$s
None
Yes, if top
Lose, if storm
None
17
The Alaska Gold Mine
(You have 14 days)
Option
Personal
Min Time Max Time Outcome Risk
No $$$s None
#1
(wait 3-4 weeks)
#2
7 days
10 days
14 days
21 days
(over top)
#3
(valley)
(wait 3 days)
#4
to top
to valley
10-13 days 17-24 days
(wait 3 days)
#5 What if walk
to for
top3 days? to valley
For sure Life
$$$s
Maybe
None
$$$s
Lose, if storm None
Yes, if top
Lose, if storm
None
IF STORM  Keep walking, same as option #3
#5IFWhat
if walkforTurn
3 days?
NO STORM
back (total 6 days) + over top (7-10 days) 13 - 16 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
Strategy Formulation
The Environment “Threats & Opportunities”
GOAL
Management’s values &
attitude toward risk
STRATEGY
Organization’s capabilities “Strengths & Weaknesses”
19
Strategic Management Process
The Environment “Threats & Opportunities”
Management’s values &
attitude toward risk
Execution/
Implementation
GOAL
STRATEGY
Control
Organization’s capabilities “Strengths & Weaknesses”
Performance
Formulation
Implementation
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More specifically …
Strategy consists of organization-wide
commitments and actions required for a
firm to exploit its competencies, gain
competitive advantage, and earn aboveaverage returns
*commitments - long term (irreversible) commitments
*actions - involving substantial creation, acquisition, or
redeployment of resources
*competitive advantage(s) – competitors are unable to
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copy/imitate
Terms
Average (or “accounting”) returns
Returns equal to those an investor expects to
earn from other investments with a similar
amount of risk
Above-Average (or “economic”) returns
Returns from firm-specific strategies that
competitors are not simultaneously implementing
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
The Strategic
Management Process
1. Strategic Planning
2. Scenario Planning
3. Strategy as Planned Emergence
24
Strategy as Planning
•Top-down rational planning
– Define mission/vision/goal (strategic intent)
– External analysis: opportunities and threats
– Internal analysis: strengths and weaknesses
– Create strategic fit through SWOT
– Formulate appropriate strategy
– Implement chosen strategy
– Monitor performance & modify if necessary
25
Strategy as Scenario Planning
Envision different "what-if" plans
Generate a dominant plan
– Must implement the most probable
option Keeps other scenarios in the
event of changes…
• "Arab Spring" impact on the oil industry?
• Tablets/mobility impact on the PC industry
– Good example of the AFI framework
26
Strategy as Planned Emergence
• Strategic Initiative
– Google 50% from the "20% rule"
– Enron wind investment…
• Mintzberg Planned Emergence
• Strategy can come from top or bottom
– Some intended strategies drop off in the process
– Allows for new emerging ideas to become
realized
– Resource allocation process (RAP)
– Serendipity can have dramatic effects
27
Competitive Landscape
Dynamics of strategic
maneuvering among
global and innovative
combatants
Hypercompetition
Fundamental nature
of competition is
changing
Price-quality
positioning, new
know-how, first
mover
Protect or invade
established product or
geographic markets
28
Competitive Landscape
Emergence of
global
economy
Hypercompetitive
environments
Fundamental nature
of competition is
changing
Goods, services,
people, skills, and
ideas move freely
across geographic
borders.
Spread of economic
innovations around
the world.
Political and
cultural
adjustments are
required.
29
Competitive Landscape
Emergence of
global
economy
Rapid technological
change
Hypercompetitive
environments
Fundamental nature
of competition is
changing
Increasing rate of
technological
change and
diffusion
The information
age
Increasing
knowledge
intensity
30
Strategic flexibility?
How can a firm develop dynamic capabilities in
response to perpetually turbulent and uncertain
competitive environments?
Can firms change? (i.e., success breeds
failure)?
31
Strategic Flexibility
Organizational
slack
Strategic
reorientation
Strategic
Flexibility
flexibility
Capacity to
learn
32
I/O Model of Above-Average
Returns
1. External
Environments
General
Global
Industry
Environment
Competitor
Environment
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?)
Technological
Environment
33
Four Assumptions of the I/O
Model
1.External environment creates pressures
and constraints that determine the
strategies that would result in aboveaverage returns (deterministic)
2.Most firms competing within a particular
segment are assumed to control similar
strategically relevant resources and to
pursue similar strategies in light of
those resources
34
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 firm’s best interests, as
shown by their profit-maximizing
behaviors
35
I/O Model of Above-Average
Returns
Industrial
Organization
Model
The External
Environment
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 industry36
I/O Model of Above-Average
Returns
Industrial
Organization
Model
The External
Environment
An Attractive Industry
2. Locate an attractive
industry with a high
potential for aboveaverage returns
Attractive industry: one
whose structural
characteristics suggest
above-average returns
37
I/O Model of Above-Average
Returns
Industrial
Organization
Model
The External
Environment
An Attractive Industry
Strategy Formulation
3. Identify the strategy
called for by the
attractive industry to
earn above-average
returns
Strategy formulation:
selection of a strategy
linked with aboveaverage returns in a
particular industry
38
I/O Model of Above-Average
Returns
Industrial
Organization
Model
The External
Environment
4. Develop or acquire
assets and skills
needed to implement
the strategy
An Attractive Industry
Strategy Formulation
Assets and Skills
Assets and skills: those
assets and skills
required to implement a
chosen strategy
39
I/O Model of Above-Average
Returns
Industrial
Organization
Model
The External
Environment
An Attractive Industry
Strategy Formulation
Assets and Skills
Strategy Implementation
5. Use the firm’s
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
40
I/O Model of Above-Average
Returns
Industrial
Organization
Model
The External
Environment
An Attractive Industry
Strategy Formulation
Assets and Skills
Strategy Implementation
Superior returns:
earning of aboveaverage returns
Superior Returns
41
Resource-based Model of
Above Average Returns
1. Firm’s Resources
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?)
42
Resource-based Process
Resource-based
Model
Resources
1. Identify the firm’s
resources-- strengths
and weaknesses
compared with
competitors
Resources: assets
(tangible or intangible)
used in delivering
products or services
43
Resource-based Process
Resource-based
Model
Resources
Capability
2. Determine the firm’s
capabilities--what it
can do better than its
competitors
Capability: how
resources are managed
and integrated in the
delivery of a product or
service
44
Valuable
Rare
Costly to imitate
Nonsubstitutable
Resources and Capabilities
Four Attributes of Resources and
Capabilities (Competitive Advantage)
allow the firm to exploit opportunities
or neutralize threats in its external
environment
possessed by few, if any, current and
potential competitors
when other firms cannot obtain them
or must obtain them at a much higher
cost
the firm is organized appropriately to
obtain the full benefits of the resources
in order to realize a competitive
advantage
45
Resources and capabilities
Valuable
Rare
Costly to imitate
Nonsubstitutable
Resources and Capabilities
that meet these four criteria become
a source of:
Core Competencies
46
Core Competencies are the
basis for a firm’s
Competitive
advantage
Strategic
competitiveness
Core Competencies
Ability to
earn aboveaverage
returns
47
Resource-based Process
Resource-based
Model
Resources
Capability
Competitive Advantage
3. Determine the potential
of the firm’s resources
and capabilities in
terms of a competitive
advantage
Competitive advantage:
ability of a firm to
outperform its rivals in
the creation of value.
48
Resource-based Process
Resource-based
Model
4. Locate an attractive
industry
Resources
Capability
Competitive Advantage
An Attractive Industry
An attractive industry is
one with opportunities
that can be uniquely
exploited by the firm’s
resources and
49
capabilities
Resource-based Process
5. Select a strategy that
best allows the firm to
utilize resources and
Resources
capabilities (that are
superior to its rivals)
Capability
relative to
opportunities in the
Competitive Advantage
external environment
An Attractive Industry
Strategy formulation
Strategy Form/Impl
and implementation:
strategic actions taken
to earn above average50
Resource-based
Model
Resource-based Model of
Above Average Returns
Resource-based
Model
Resources
Capability
Competitive Advantage
An Attractive Industry
Strategy Form/Impl
Superior returns:
earning of aboveaverage returns
Superior Returns
51
52
Strategic Intent
What is forming strategic intent?
• Identifying a desired position in
the long term that far exceeds a
company's current resources and
capabilities
• E.g., Sony, Komatsu (encircle
Caterpillar) , Canon (beat Xerox)
53
Strategic Intent
The resources required to realize
the strategy may not be available
initially
 Intent is about seeing the end
state and deciding how to
leverage internal resources,
capabilities, and core competencies
in a “staged” approach

54
Mission
Fundamental question of Goal Choice:
• Profitability (net profits)
• Efficiency (low costs)
• Market Share
• Growth (e.g., ^ in total assets, sales, etc)
• Shareholder Wealth (dividends plus stock
price appreciation)
• Utilization of Resources (e.g., ROE, ROI)
• Reputation
• Contribution to Stakeholders (e.g.,
employees, society)
• Survival (avoid bankruptcy)
55
Mission
Intel Corp.
• From product orientation …
– To be the pre-eminent building block supplier of
the PC industry
– To be the pre-eminent building block supplier of
the Internet economy
• To customer orientation …
– Delight our customers, employees, and
shareholders by relentlessly delivering the
platform and technology advancements that
become essential to the way we work and live
• But…what links a firm’s mission statement
with competitive advantage?
56
Strategy Process
• Strategic Planning
• Scenario Planning
• Strategy as “Planned Emergence”
57
Strategy Process
Rational Planning
• Define mission, vision, goals (strategic
intent)
• External analysis - opportunities and
threats
• Internal analysis of strengths and
weaknesses
• Create strategic fit through SWOT
• Formulate appropriate strategy
• Implement chosen strategy
• Monitor performance & modify if necessary
58
Strategy Process
Scenario planning
• Envision different "what-if" plans
– Generates a dominant plan
• Implement the most probable option
– Keep other scenarios in the event of
changes…
– "Arab Spring" impact on the oil industry?
59
Strategy Process
Scenario Planning - The future cannot
be known, e.g.,
• UPS, FedEx, AirTran, Delta …
– How to compete if the barrel of oil
costs $35 or $200?
• Boeing, Harley-Davidson, Caterpillar …
– How to compete if 1 euro = $2 or $1
= 75 yen
• How to obtain capital when credit
markets are frozen?
• Tendency however is not to think about
pessimistic scenarios
60
Strategy Process
Emergent Strategy
• Strategy can come from top or bottom
• Some intended strategies drop off in
the process, new ideas realized
• Resource reallocation required
• Sometimes deliberate – Real Options
• Serendipity can have dramatic effects
• Technological innovation |≠| success
61
The Firm and Its
Stakeholders
Stakeholders
Groups
The firmwho
must
aremaintain
affected
performance
by a at
firm’s
an
performance
adequate level
and
in who
order
have
to retain
claims
theon its
wealth
participation of key
stakeholders
62
Critical dependency:
Stakeholders
Stakeholders Provide Resources
Capital Markets
Shareholders
(institutional
ownership most
active)
Major suppliers of
capital
•Banks
•Private lenders
•Venture
63
capitalists
Stakeholders Provide Resources
Capital Markets
Product Markets
Primary customers
Suppliers
Host communities &
regulatory bodies
Unions
64
Stakeholders Provide Resources
Capital Markets
Product Markets
Organizational
Employees
Managers
Nonmanagers
65
Stakeholder Involvement
Two issues affect the
extent of stakeholder
involvement in the firm
Organizational
1
How do you divide the returns to
keep stakeholders involved?
E.g., Compensate employees?
Increase dividends? Increase
product value?
Capital
Market
Product
Market
66
Stakeholder Involvement
Two issues affect the
extent of stakeholder
involvement in the firm
Organizational
2
How do you increase
the returns so
everyone has more
to share?
Capital
Market
Product
Market
67
Some financial metrics
Profitability: important to Shareholders and Senior Managers
Shareholders: ROE - return on equity
Dividend Yield
Senior Mgrs: ROA - return on assets
ROS - return on sales
Expense Ratios
Profit Margin
Liquidity: Impt to Lenders
Current Ratio
Debt/Equity Ratio
Quick Ratio
Efficiency: Internal Usage
Accounts Receivable Turnover
Inventory Turns
68
Cases
• Describe actual situations
– Forces you to choose among different options
and plan implementation actions
• Cases include background events
and supporting materials
–
–
–
–
Financial statements
Operational data
Product lists
Transcripts of interviews with employees
69
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
70
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%
71
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