Chapter 1
Introducing Strategic
Management
OBJECTIVES
1 Understand what a strategy is and identify the
difference between business-level and corporatelevel strategy
Understand the relationship between strategy
2 formulation and implementation
3 Describe the determinants of competitive advantage
4 Recognize the difference between a fundamental
and a dynamic competitive advantage
5 Understand why we study strategic management
1
A TALE OF TWO STORES
Sears
launches
catalog
business
Takes control of
production and
distribution
Rapid growth,
driven by endbased locations
and companycontrolled factories
Experts believe
Sears way was
the only way to
compete “The
paragon of
retailers”
Financial
trouble; sells off
all non-retail
businesses
Acquired
by KMart
1970
1891
1924
Moves into on-premise
retailing/General Robert
Wood takes over
1960
1980
1990
2000 2005
Expands into banking,
investments, real estate
services, and insurance
Sam Walton opens
first Wal-Mart with
focus on low-prices
Dizzying
growth
1962 1970
1980
30 stores located in
“one-horse towns which
everybody else was
ignoring”; Sam Walton
Perfects model; grows;
expands into new markets
(international) and store
concepts (Sam’s clubs)
A Firm’s performance
is directly
related to the
quality of its
strategy and
its competency in implementing it
2000
Invests $500 million in
inventory management
technology
2
TWO RETAILERS AT A GLANCE
Sears
Wal-Mart
Year founded
1891
1962
Stores 1980
Stores 2004
864
2026
Revenues 1980
Revenues 2004
$25,194 million
$36,100 million
Net profits 1980
Net profits 2004
606M (2.4% return on sales)
507M (-1.4% return on sales)
$55 M(3.3% return on sales)
$10,267 M
(3.6% return on sales)
Market capitalization 1980
Market capitalization 2004
USD 4.8 billion
USD 12.2 billion
USD 1 billion
USD 200.2 billion
600
5289
$1,643 million
$285,222 million
3
A TALE OF TWO RETAILERS – PERFORMANCE MEASURES
USD millions
4
THREE OVERARCHING THEMES
Implementing a good
strategy is at least as
important as creating
one, yet many
managers give too
little thought to
implementation


To succeed,
the formulation
of a good strategy
and its implementation should be
inextricably
connected
Firms and
industries are
dynamic in
nature

Strategic leadership is essential if a
firm is able to both
formulate and implement strategies that
create value
Strategic leadership
is responsible for
 making substantive
resource allocation
decisions and
developing keystakeholder support
of the strategy
We need to see a firm’s competitive position, not as a snapshot, but
as an ongoing movie
5
STRATEGY
Strategos: “the general’s view”
Holistic “big picture”
General
Lower officer (e.g., supply
logistics infantry, heavy armored
vehicles)
Tactical details
6
THE STRATEGIC MANAGEMENT PROCESS
Strategic analyses
• Internal
• External
Strategy
Vision and
mission
• Fundamental
organizational
purpose
• Organizational
values
•
•
•
•
•
Arenas
Vehicles
Differentiators
Staging
Economic logic
The central, integrated,
externally oriented
concept of how a firm
will achieve its
objectives
Implementation
levers
and
Strategic
leadership
7
QUESTIONS OF CORPORATE-LEVEL AND BUSINESS-LEVEL STRATEGY
Unit of measure
Corporate-level strategy should ask
• In which markets do we compete today?
• In which markets do we want to
?
compete tomorrow?
• How does our ownership of a business
ensure its competitiveness today and in
the future?
Business-level strategy should ask
• How do we compete in this market
today?
?
• How will we compete in this market
in the future?
8
STRATEGY AND IMPLEMENTATION ITERATE
Strategy:
The process
of deciding
what to do
Compete as
discount retailer
in rural markets
WAL-MART EXAMPLE
Leverage inventory
and sourcing systems
to be low-cost leader
Implementation:
The process of
performing all the
activities necessary
to do what has been
planned
Invest heavily in
organizational structure,
systems, and processes
9
UNPLANNED ACTIONS CAN DRIVE STRATEGY
Intel’s original focus
(1970s & 1980s)
Design and manufacture
of Dynamic, RandomAccess Memory Chips
(DRAM)
Focus on microprocessor segment
By 1984, 95%
of Intel revenue
came from the
microprocessor
segment
Unplanned
experimental
venture to make
microprocessors
for Busicom, a
Japanese
calculator maker
10
BUSINESS STRATEGY DIAMOND
Arenas
• Where will we be active? ( and with
Arenas
Staging
• What will be our speed and
sequence of moves?
– Speed of expansion?
– Sequence of initiatives
Staging
Economic logic
• How will returns be obtained?
– Lowest costs through scale
advantages?
– Lowest costs through scope
and replication advantages
– Premium prices due to
unmatchable service?
– Premium prices due to
proprietary product features?
Economic
logic
how much emphasis?)
– Which product categories?
– Which channels?
– Which market segments?
– Which geographic areas?
– Which core technologies
– Which value-creation strategies?
Vehicles
Vehicles
• How will we get there?
– Internal development?
– Joint ventures?
– Licensing/franchising?
– Experimentation?
– Acquisitions?
Differentiators
Differentiators
• How will we win?
– Image?
– Customization?
– Price?
– Styling?
– Product reliability?
– Speed to market?
11
PROFITABILITY AND MARKET VALUATION OF US AIRLINE INDUSTRY
Profitability
Market valuation
12
JET BLUE STRATEGY
Arenas
• Low fare commercial air carrier
• Underserved but over-priced US cities
• Start from scratch and achieve all growth
Vehicles
internally (i.e., do not purchase a regional airline)
Objective
To “bring
humanity
back to air
travel”
• High level of service compared to low fare competitors
Differentiators
(e.g., leather seating, satellite TV)
• Grow from one route between two cities to serving 20
Strategy
cities in just 3 years
• Secure cost advantage by being willing and able to
Economic logic
perform key tasks differently
– One type of plan
– JFK home base
– Secondary location
13
GOALS OF STRATEGY IMPLEMENTATION
1 To make sure strategy formulation is
comprehensive and well informed
2 To translate good ideas into actions
that can be executed (and sometimes
to use execution to generate or
identify good ideas)
14
IMPORTANCE OF EXECUTION
“The important decisions, the
decisions that really matter, are
strategic . . . [But] more important
and more difficult is to make
effective the course of action
decided upon.”
– Peter Drucker
15
FRAMEWORK FOR STRATEGY IMPLEMENTATION
Key Factors of Strategy Implementation
Implementation levers
• Organizational structure
Intended
Strategy
• Systems and processes
• People and rewards
Realized
and
Emergent
Strategies
Strategic leadership
• Lever- and resource-allocation decisions
• Decision support among stakeholders
16
IMPLEMENTATION LEVERS
Implementation
levers
Description
Organizational
structure
Structure is the manner in which responsibilities, tasks, and people are
organized. It includes the organization’s authority structure, hierarchy,
units, divisions, and coordinating mechanisms
Systems and
processes
Systems are all the organizational processes and procedures used
in daily operations. These include control and incentive systems,
resource-allocation procedures, information systems, budgeting,
and distribution
People and
rewards
The people and rewards lever points to the importance of using all
organization members to implement a strategy. Competitive advantage
is generally tied to your human resources. Successful implementation
depends on having the right people and then developing and training
them in ways that support the firm’s strategy. In addition, rewards – how
you pay your people – can accelerate the implementation of your
strategy or undermine it
17
COMPETITIVE ADVANTAGE
Competitive
Advantage: a
Firm’s ability to
create value in a
way that its
rivals cannot
Key question:
how do Firms
create sustained
above-average
returns?
18
THREE PERSPECTIVES OF COMPETITIVE ADVANTAGE
Internal
Often called the “resource
view”, contends that firms
are heterogeneous
bundles of resources and
capabilities and firms with
superior resources and
capabilities enjoy
competitive advantage
over other firms. This
advantage makes it
relatively easier to achieve
consistently higher levels
of performance
External
Also called the “positional
view”, contends that
variations in a firm’s
competitive advantage and
performance are primarily
a function of industry
attractiveness. Companies
should therefore either (1)
position themselves to
compete in attractive
industries or (2) adopt
strategies that will make
their current industries
more attractive
Dynamic
Suggests that in dynamic,
rapidly changing markets,
a firm’s current market
position is not an accurate
prediction of future
performance. Instead, we
look at the past for clues
about how the firm arrived
at its current position and
to future trends – both
internal and external – in
an effort to predict the
future landscape
19
SUMMARY
1 Understand what a strategy is and identify the difference
between business-level and corporate-level strategy
2 Understand the relationship between strategy formulation
and implementation
3 Describe the determinants of competitive advantage
4 Recognize the difference between a fundamental and a
dynamic competitive advantage
5 Understand why we study strategic management
20
REVIEW QUESTIONS
• What is strategic management?
• What are the key components of the strategic management process?
• How does business strategy differ from corporate strategy?
?
• What is the relationship between strategy formulation and strategy implementation?
• What are the five elements of the strategy-formulation – diamond model?
• What are the internal and external perspectives on competitive advantage?
• What are the fundamental and dynamic perspectives on competitive advantage?
• Why should you study strategic management?
21
GROUP ACTIVITY
 Identify the characteristics of a firm at which group members
would like to work.
 Then select an example of a firm that fits your description.
 What is the difference between business and corporate
strategy at this firm?
 How could this difference affect the experiences and
opportunities that you might gain by working for this firm?
 Finally, taking advantage of your insight into the firm’s strategy,
construct a high-impact job-application cover letter.
22
GROUP ACTIVITY
 Identify a firm that may be thinking of expanding
into new international markets.
 Apply the staging element of the strategy
diamond to the firm’s expansion opportunities or
plans.
 Which markets should it target first and why?
 How will international expansion be related to the
firm’s business and corporate strategies?
23