Chapter 1
The Concept of Strategy
Daniel Trejo
Daniel Hanson
Jonathan Kiser
Blake Hiett
Key Points to Chapter 1
• The origins of how strategy was developed and how views of strategy have
changed over time
• Some basic principles as to what strategy is and how it is applied in todays
world
• Learn about some of the questions surrounding corporate values and social
responsibility in the workplace
• Understand the basic approach to strategy that underlies the book
Origins of Strategy
• Strategy comes from the Greek work strategic meaning generalship
• The concept of strategy however did not originate with the Greeks, but with
Sun Tzu’s classic the Art of War (500 B.C.)
• Regarded the first treatise on strategy
Origins of Strategy Cont’d
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Strategy is concerned with winning the war.
Strategy is the overall plan for deploying resources to establish favorable position
Strategic decisions, whether military or business share three common
characteristics
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They’re important
involve a significant commitment of resources
are not easily reversible
Evolution of business strategy
• Business strategy has been driven more by the practical needs of business
than by the development of business
• 50s and 60s senior execs. Experienced increasing difficulty in coordinating
decisions and maintaining control in companies that were growing in size
and complexity
Corporate Planning
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Developed in the late 50s
Macroeconomic forecasts provided the foundation for the new corporate planning
Typical format was a 5 year format
Set goals and objectives
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Forecast key economic trends (including market demand, market share, revenue,
costs, and margins
Established priorities for different products and business areas of the firm and
allocated capital expenditures
By the mid 60s most large US and European companies had set up corporate planning
depts.
Fall of corporate planning
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Due to the oil shocks of 74 and 79 and failure of diversification to deliver the
anticipated synergies.
This lead to an era of macroeconomic instability, combined with increased
international competition from resurgent Japanese, European and Southeast Asian
firms
Firms could no longer plan their investments, new product introductions and
personnel requirements 3 to 5 years ahead. They could no longer forecast that far
into the future
This resulted in a shift from planning to strategy making where the focus was less
in detailed management of companies growth paths than on positioning the
company in markets and in relation to competitors in order to maximize the
potential for profit. This was know as strategic management.
Strategic management
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Associated with increasing focus on competition as the central characteristic of the
business environment and competitive advantage as the primary goal of strategy
Also directed attention to business performance
During the late 70s and into the 80s attention focused on sources of profit within
the industry environment
Michael porter of Harvard business school pioneered the application of industrial
organization economics to analyzing industry profitability
Other studies focused on how profits were distributed between different firms in
an industry, in particular the impact of market share and experience upon costs and
profits
Strategic Management Cont’d
• During the 90s focus of strategy analysis shifted from the sources of profit in
the external environment to the sources of profit within the firm.
• Resources and capabilities of the firm became regarded as the main source
of competitive advantage and the primary basis for formulating strategy
TMT
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Technology, Media, Telecommunications
Technology reshaped industries
Digital technologies are associated with
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standard wars,
the emergence of winner take all markets and,
the potential for strategic innovation as firms seek the blue oceans of uncontested
market space.
Due to continuous change and relentless competition, strategy becomes less about
building positions of sustained competitive advantage and more about developing the
responsiveness and flexibility to create successive temporary advantages.
Resource based view
• Is the emphasis on internal resources and capabilities and encourages firms
to identify how they are different from their competitors and design
strategies that exploit theses differences rather that seeking attractive
markets and favorable competitive positions
• Michael porters answer to the question, “What is strategy?” was,
“Competitive strategy is about being different. It means deliberately
choosing a different set of activates to deliver a unique mix of value.”
Michael Porters Response
• http://youtu.be/ibrxIP0H84M
5 Main Questions of Strategy
• What is strategy?
• How do we describe a firm’s strategy?
• How do we identify a firm’s strategy?
• How is strategy made
• What roles does strategy perform?
What is Strategy?
• Corporate strategy-the scope of the firm in terms of the industries and
markets in which it competes.
• Business strategy- how the firm competes within a particular industry or
market
Which industries
should we be in?
How do we
make money?
How should we
compete?
Corporate
Strategy
Business
Strategy
How to Describe a Firm’s Strategy
Static
• Where are we competing?
• Product scope: vacuum cleaner
• Hand dryers, fans and an array of other
product
• Geographical scope: product sales in 52
countries
• Vertical scope: a range of products can be
purchased direct from Dyson through its web site
• How are we competing?
• By focusing on invention, design and
engineering.
Dynamic
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What do we want to become?
A household name i.e Dysoning rather than hovering
What do we want to achieve?
Sales growth through geographic expansion: 80
countries by 2015
How will we get there?
Through high levels of investment in R&D and
organic growth
How Do We Identify a Firm’s Strategy?
• The mission statement is basic statement of organizational purposes- “ Why
we exist”
• A statement of principle or values outlines- “ What we believe in and how we
will behave”
• The Vision statement projects- “ What we want to be”
• The strategy statement articulates- “ What our competitive game plan will
be”
How is strategy made?
• Intended strategy- conceived of by the top management team
• Realized strategy- the actual strategy that is implemented
• Emergent strategy-the decisions that emerge from the complex processes
in which individual managers interpret the intended strategy and adapt to
changing external circumstances
The Roles that Strategy Performs
• Strategy as Decision Support
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Strategy improves decision making in 3 different ways
1) Strategy simplifies decision making
2) Strategy-making process allows knowledge to be pooled
3) Strategy-making process facilitates the use of analytic tools
• Strategy as a Coordinating Device
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Strategy can promote coordination through communication
Buy-In is essential throughout the organization
Goals, commitments, and performance targets can guarantee can guarantee the
proper strategy is being used
The Roles that Strategy Performs Cont’d
• Strategy as a Target
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Forward-looking strategies set up a direction for an organization
Stretch and resource leverage should be key to an organization’s strategy
• Strategy as Animation & Orientation
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Mobilized, encouraging, and working in sync with one another
Strategize as accurately as possible
Shareholders or Stakeholders
• All organizations strive to create value by activities they partake in
• Value is distributed between: employees, customers, owners, ect
• Take the value and turn it into profits
• Stakeholders approach can be conflicting for top management
• Strategy designed in interest of all stakeholders is a hot issue
• Different areas of the world have different interest
Profit and Purpose
• Profit is not the sole motivation factor for companies
• Pursuit of profits often isn’t achieved by firms
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1) Profit is only a effective if managers know what determines profit
2) Maximizing shareholders wealth isn’t a great motivating tool
3) Choosing the right strategy can motivate all employees
Corporate Social Responsibility
• “A firm’s obligation to society to exceed its minimum financial and legal
requirements to stakeholders and to take into account the social and
environmental impacts of its decisions.”
Debate Over CSR
• What are company’s obligations to society as a whole?
• Milton Friedman declared corporate social responsibility to be both
unethical and undesirable.
• “There’s one & only one social responsibility of business – to use its
resources & engage in activities designed to increase profits so long as it
stays within the rules of the game, which is to say, engages in open & free
competition without deception or fraud.” - Milton Friedman
What is CSR?
• https://www.youtube.com/watch?v=yzvy5IgqTvw
Notions of the Public Corporation
• William Allen contrasts two different notions:
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‘The property conception’, which views the firm as a set of assets owned by
stockholders.
‘Social entity conception’, which views the firm as the community of individuals that is
sustained & supported by its relationships with its social, political, economic and
natural environment.
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“To regard profit as the purpose for which companies exist is a tragic confusion”
Narrowing The Focus
• We limit our discussion to private sector firms operating in market
economies assuming that such firms operate in the interests of their owners
by seeking to maximize profits in the long run.
• “The foundations of mainstream strategy lie in analysis of competition and
firms’ quests to outperform their rivals.”
Narrowing The Focus Cont’d
• The four key considerations:
• Competition- competition erodes profit.
• The market for corporate control- teams that fail to max profits will be
replaced by teams that do
• Convergence of stakeholder interests-profitability requires loyalty from
employees, trusting relationships with suppliers and customers, and
support from the government and the communities
• Simplicity-considering multiple goals and specifying trade-offs between
them vastly increases the complexity of decision making
The Basic Framework For Strategy Analysis
The Firm
• Goals and
values
• Resources and
capabilities
• Structure and
systems
The Industry
Environment
Strategy
• Competitors
• Customers
• Suppliers
The Basic Framework Cont’d
• Fundamental to this view of strategy as a link between the firm and its
external environment is the notion of strategic fit. For a strategy to be
successful, it must be consistent with the firm’s external environment and
with its internal environment.
Summary of Chapter 1
• The origins of how strategy was developed and how views of strategy have
changed over time
• Some basic principles as to what strategy is and how it is applied in todays
world
• Learn about some of the questions surrounding corporate values and social
responsibility in the workplace
• Understand the basic approach to strategy that underlies the book
Questions?
Quiz over Chapter 1
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1. Which of the following is not conductive to success?
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A. Having a leader or leadership team that can make decisions and marshal the resources and
capabilities needed to implement those decisions.
B. Basing strategy on the objective appraisal of resources.
C. Developing strategy on the basis of frequent and rapid revisions to goals.
D. Developing strategy on the basis of a detailed knowledge of the competitive environment.
2. The decision by the Indian multi-national company, Tata, to extend its activities steel
production into the motor industry and consultancy services provides an illustration of
strategy at which of the following levels?
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A. Business
B. Functional
C. Corporate
D. International
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Quiz Cont’d
3. Which of the following statements offers the best definition of a mission
statement?
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A. It outlines the organization’s game plan with respect to competition.
B. It addresses why the firm exists.
C. It projects what the organization wants to look like in the future.
D. It states how those working for the organization should behave.
4. Which of the following statements best describes an emergent strategy?
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A. The strategy that emerges from the deliberations of the top management team.
B. The scheme of action and the maneuvers that a firm deploys in order to win a
competitive battle.
C. The decisions that emerge from complex processes in which individual managers
interpret the intended strategy of the top management team.
D. The actual strategy that is put into practice.
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Quiz Cont’d
5. To identify a firm’s strategy you should:
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A. Look at the firm’s mission statement
B. Explore the public pronouncements of the firm’s chief executive officers and his senior
management team.
C. Look at the decisions the firm has taken and what it actually does.
D. All of the above.
6. In the context of strategy, the term ‘value’ is best defined as:
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A. The profits a firm makes from its sales of good or services.
B. A measure of the extent to which goods or services are perceived by customers as meeting their
needs or wants and is reflected in the price they are willing to pay for these goods or services.
C. The revenue a firm generates from its sales of goods or services.
D. The difference between the amount that a producer receive from the sale of good or service and
the lowest amount that this producer would be willing to accept for that good or service.
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Quiz Cont’d
7. Which of the following statements best describes Grant’s notion of ‘planned
emergence’?
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A. Top management passes strategic directive and guidelines down the organization but
decisions are enacted locally and adaption occurs.
B. It is a series of actions designed to achieve a specific goal or effect.
C. It is a process of bottom-up decision making.
D. It is a process of trial and error learning from which strategy emerges.
8. In the context of strategy stakeholders are:
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A. Individuals or groups that have a financial stake in the company.
B. Individuals and groups external to the firm that have the power to influence the resource
allocation decision the firm makes.
C. Groups or coalitions within the firm that shape the decisions taken by senior.
D. Individuals or groups that are affected by, or can affect, a firm’s actions.
Quiz Cont’d
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9. Which of the following statements is false? Organizations who make profit their primary
aim often fail to achieve this goal because:
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a. Profit maximization involves charging high prices, cutting costs and reducing quality, which deters
consumers.
b. Obsession with profits can blinker managers’ perceptions of the real drivers of superior
performance.
c. The single-minded pursuit of profit is unlikely to encourage cooperation and unity amongst
stakeholders.
d. The maximization of returns to shareholders is unlikely to inspire employees.
10. Which of the following statements best describes Corporate Social Responsibility?
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a. The obligation that a firm has to make sure its managers act in accordance with the law.
b. A firm’s obligation to society to take into account the affect of its decisions on the environment.
c. A firm’s obligation to society to exceed its minimum financial and legal requirements to
stakeholders and to take into account the social and environmental impact of its decisions.
d. The duty of care the firm’s top management team has towards its employees and customers.
Answers to Quiz
• 1. C
• 2. D
• 3. B
• 4. C
• 5. D
• 6. B
• 7. A
• 8. D
• 9. A
• 10. C