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Chapter 1 What Is Strategy?

Chapter 1 What Is Strategy?. The AFI Strategy Framework. Jump to Appendix 1 long image description. Chapter 1 Outline. 1.1 What Strategy Is: Gaining and Sustaining Competitive Advantage What Is Competitive Advantage? Industry vs. Firm Effects in Determining Firm Performance

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Chapter 1 What Is Strategy?

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  1. Chapter 1What Is Strategy?

  2. The AFI Strategy Framework Jump to Appendix 1 long image description

  3. Chapter 1 Outline 1.1 What Strategy Is: Gaining and Sustaining Competitive Advantage • What Is Competitive Advantage? • Industry vs. Firm Effects in Determining Firm Performance 1.2 Stakeholders and Competitive Advantage • Stakeholder Strategy • Stakeholder Impact Analysis 1.3 The AFI Strategy Framework 1.4 Implications for the Strategist

  4. Learning Objectives LO 1-1 Explain the role of strategy in a firm’s quest for competitive advantage. LO 1-2 Define competitive advantage, sustainable competitive advantage, competitive disadvantage, and competitive parity. LO 1-3 Differentiate the roles of firm effects and industry effects in determining firm performance. LO 1-4 Evaluate the relationship between stakeholder strategy and sustainable competitive advantage. LO 1-5 Conduct a stakeholder impact analysis.

  5. What Strategy Is: Gaining and Sustaining Competitive Advantage

  6. Strategic Management Strategic Management: an integrative management field that combines analysis, formulation, and implementation in the quest for competitive advantage

  7. Strategy • Strategy: a set of goal-directed actions a firm takes to gain and sustain superior performance relative to competitors • To achieve superior performance, companies compete for resources: • New ventures: for financial and human capital • Existing companies: for profitable growth • Charities: for donations • Universities: for the best students and professors • Sports teams: championships • Celebrities: media attention

  8. Elements of a Good Strategy • Analysis • Diagnosis of the competitive challenge • Formulation • Guiding policy to address the competitive challenge • Implementation • A set of coherent actions to implement the firm’s guiding policy

  9. Elements of a Good Strategy: Analysis • Analysis • Diagnosis of the competitive challenge • Accomplished through strategy analysis of the firm’s internal and external environments Example: Twitter • Competitive challenge: grow its user base • Become more valuable for online advertisers • Also: Facebook allows advertisers to target their online ads precisely based on demographic data

  10. Elements of a Good Strategy: Formulation • Formulation • Guiding policy to address the competitive challenge • Accomplished through strategy formulation, resulting in the firm’s corporate, business, and functional strategies Example: Twitter • Rather than formulating a guiding policy to grow active core users, Twitter defined its user base more broadly. • Defined users into 3 types to compare with Facebook • User types were hard to track and less valuable to advertisers.

  11. Elements of a Good Strategy: Implementation • Implementation • A set of coherent actions to implement the firm’s guiding policy • Accomplished through strategy implementation Example: Twitter • Different user definitions confused management and limited guidance for employees. • Consequences of the unclear mission: • Frustration among managers and engineers • Turnover of key personnel • Internal turmoil resulted, including management demotions and promotions of CEO friends.

  12. Competitive Advantage • Competitive Advantage: a firm that achieves superior performance relative to other competitors in the same industry or the industry average • Always relative, not absolute • To assess competitive advantage: • Compare firm performance to a benchmark • Performance of other firms in the same industry • An industry average

  13. Competitive Advantage: Examples • In digital advertising: Google • Google has a competitive advantage over Facebook, Twitter, and Yahoo • In smartphones: Apple • Apple has achieved a competitive advantage over Samsung, Microsoft, and BlackBerry

  14. Competitive Advantage: Key Points • Competitive Advantage • Superior performance relative to other competitors in the same industry or the industry average • Sustainable Competitive Advantage • Outperforming competitors or the industry average over a prolonged period of time • Competitive Disadvantage • Underperformance relative to other competitors in the same industry or the industry average • Competitive Parity • Performance of two or more firms at the same level

  15. Strategy Is About Creating Superior Value • The rewards of superior value creation and capture are profitability and market share. • Sam Walton (Walmart): offered lower prices. • Steve Jobs (Apple): “put a ding in the universe.” • Mark Zuckerberg (Facebook): made the world open and connected. • Larry Page and Sergey Brin (Google): made information accessible.

  16. Strategic Positioning • Stake out a unique position within an industry to provide value to customers, while controlling costs. • The greater the difference between value creation and cost: • the greater the firm’s economic contribution. • the more likely it will gain competitive advantage.

  17. Strategic Positioning Requires Trade-offs • Managers must make conscious trade-offs. • Enables competitive advantage • In the retail industry, for example: • Walmart: “everyday low prices” • Nordstrom’s: professional sales people in a luxury setting

  18. 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: Walmart’s strategic activities strengthen its position as cost leader • Big stores in rural locations • Low corporate overhead • Low base wages

  19. Strategy Highlight 1.1 (1 of 2) • Threadless: an online design community and apparel store • Let consumers “work for them” • Community members vote on which t-shirt designs they like best. • Leverages the wisdom of the crowds • At Threadless, the customers play a critical role across the entire value chain. • From idea generation to design, marketing, sales forecasting, and distribution

  20. Strategy Highlight 1.1 (2 of 2) • Business model translates market research and design into quick sales. • Good understanding of the market • Design contest participation • Threadless has sold every T-shirt it has printed. • Has a cult-like following • It is outperforming established companies • American Eagle, Old Navy, and Urban Outfitters

  21. What Strategy Is Not • Grandiose statements • Statements of desire • Ex: “Our strategy is to win” or “We will be No. #1” • A failure to face a competitive challenge • Managers must know whether they are making progress in addressing the challenge. • Operational effectiveness, competitive benchmarking, or other tactical tools • These support competitive strategy, but are not sufficient to sustain it.

  22. Industry Vs. Firm Effects In Determining Firm Performance (1 of 3) • Industry effects: describe the underlying economic structure of the industry. • Determined by elements common to all industries • Examples: • Entry and exit barriers • Number and size of companies • Types of products and services offered • About 20% of a firm’s profitability depends on the industry it’s in.

  23. Industry Vs. Firm Effects In Determining Firm Performance (2 of 3) • Firm effects: firm performance is attributed to managerial actions. • More important factor in determining firm performance than external environment forces • A firm’s strategy can explain up to 55% of its performance.

  24. Industry Vs. Firm Effects In Determining Firm Performance (3 of 3) • Exhibit 1.1

  25. Stakeholders and Competitive Advantage

  26. Value Creation for Society (1 of 2) • Companies with good strategy generate value for society. • Firms compete in their own self-interest. • Firms obeying the law and acting ethically • Companies with a good strategy: • Provide products or services to consumers at an affordable price • Make a profit • Benefit both parties • Make society better

  27. Value Creation for Society (2 of 2) • Successful companies create value for the economy: • Education, public safety, and health care • Superior performance allows a firm to reinvest some of its profits for growth • More opportunities for employment • Example: Google • Employs 55,000 people • People rely on Google for information

  28. Strategic Failure is Expensive • HP has not been able to address the competitive challenges effectively: • Stakeholders suffered • Shareholder value was destroyed • Had to lay off thousands of employees • Customers no longer received innovative products • Google and HP illustrate the relationship between individual firms and society at large

  29. Black Swan Events (1 of 2) • In the past, most people assumed that all swans were white. • When they first encountered swans that were black, they were surprised. • Today, the metaphor of a black swan describes the high impact of a highly improbable event.

  30. Black Swan Events (2 of 2) • Trust between corporations and society have deteriorated because of black swans . • Accounting Scandals: Enron • Real Estate Bubble: 2008 financial crisis • Managerial actions can affect the well-being of people around the globe. • Most black swan events result from executive actions (or inactions.)

  31. Stakeholders (1 of 2) • Stakeholders: • Organizations, groups, and individuals • They can affect or are affected by a firm’s actions. • Have a vested claim or interest in the performance and continued survival of the firm. • Internal stakeholders: • Stockholders, employees (including executives, managers, and workers), and board members • External stakeholders: • Customers, suppliers, alliance partners, creditors, unions, communities, media, and governments at various levels

  32. Stakeholders (2 of 2) • Stakeholders make contributions, and they also receive benefits. • Employees • Shareholders • Communities • The firm is embedded in an exchange relationship with internal and external stakeholders.

  33. Exhibit 1.2 Internal and External Stakeholders in an Exchange Relationship with the Firm Jump to Appendix 2 long image description

  34. Stakeholder Strategy • Managing stakeholders in order to gain and sustain competitive advantage • Firms analyze and manage stakeholders • Determine how external and internal stakeholders interact • Stakeholders can create and trade value • Exemplifies how managers can act to improve firm performance • Enhances competitive advantage • Enhances continued survival • Example: Target Corporation

  35. Effective Stakeholder Management Benefits Firm Performance • Cooperation and information availability • Lowered costs • Greater organizational adaptability and flexibility • More predictable and stable returns • Stronger reputation

  36. “World’s Most Admired Companies” • Most managers care about public perception. • Fortune magazine publishes the “World’s Most Admired Companies” annually: • In 2014, the top five companies were Apple, Amazon, Google, Berkshire Hathaway, and Starbucks.

  37. Stakeholder Impact Analysis (1 of 3) • Primary stakeholders: achieve their objectives • Shareholders and investors • Other stakeholders: satisfy concerns • Employees, suppliers, and customers • Stakeholder impact analysis: • A decision tool • Managers recognize, prioritize, and address stakeholder needs

  38. Stakeholder Impact Analysis (2 of 3) • A five-step process recognizing stakeholders’ claims. • Managers must note three stakeholder attributes: • Power • Legitimacy • Urgency

  39. Exhibit 1.3 Stakeholder Impact Analysis (3 of 3) Jump to Appendix 3 long image description

  40. Step 1: Identify Stakeholders • Focus on stakeholders that the firm has, or potentially can have • Identify: powerful internal and external stakeholders and their needs • For public-stock companies: shareholders and suppliers of capital • Also: customers, suppliers, and unions • Example: Boeing • Its new 787 Dreamliner will be built in its non-unionized South Carolina factory

  41. Step 2: Identify Stakeholder Interests • Specify and assess the interests and claims of stakeholders. • Use the power, legitimacy, and urgency criteria. • Shareholders: • Legal owners • Have legitimate claim on a company’s profits • Employees can be turned into shareholders. • Coca-Cola, Google, Microsoft, Southwest Airlines, Starbucks, Walmart, and Whole Foods all offer stock ownership plans. • ‘Shareholder activists’ put public pressure on a company to change its strategy,

  42. Step 3: Identify Opportunities and Threats • Opportunities and threats are two sides of the same coin. • Example: consumer boycotts can be a credible threat. • Example: PETA: called for a boycott of McDonald’s due to alleged animal-rights abuses. • Managers should try to transform threats into opportunities. • Example: Sony • Dutch government blocked PlayStation shipments due to a toxic cable. • Sony’s response included a redesign of its supplier management system.

  43. Step 4: Identify Societal Responsibilities • “What economic, legal, ethical, and philanthropic responsibilities do we have to our stakeholders?” • Corporate Social Responsibility (CSR): • A framework to recognize and address economic, legal, social, and philanthropic expectations

  44. Exhibit 1.4 The Pyramid of Corporate Social Responsibility SOURCE: Adapted from A. B. Carroll (1991), “The pyramid of corporate social responsibility: Toward the moral management of organizational stakeholders,” Business Horizons, July-August: 42. Jump to Appendix 4 long image description

  45. Step 5: Address Stakeholder Concerns • Managers decide the appropriate course of action. • The attributes of power, legitimacy, and urgency help to prioritize legitimate claims.

  46. Strategy Highlight 1.2 (1 of 4) • On April 20, 2010, an explosion occurred. • At a drilling rig off the Louisiana coastline • Killed 11 workers • The oil spill continued for over three months. • It released an estimated 5 million barrels of crude oil into the Gulf of Mexico. • The largest environmental disaster in U.S. history

  47. Strategy Highlight 1.2 (2 of 4) • The cleanup cost was $14 billion. • Tony Hayward, BP’s CEO at the time, was fired. • Experts said BP’s problems were systemic: • Management repeatedly failed to put a safety culture in place.

  48. Strategy Highlight 1.2 (3 of 4) • BP faced thousands of claims by many small business owners. • Mainly in the tourism and seafood industries • Collectively, the small business owners became powerful BP stakeholders. • BP paid out over $25 billion to settle their claims.

  49. Strategy Highlight 1.2 (4 of 4) • Total cost for this incident: $60 billion • The Environmental Protection Agency (EPA) banned BP from any new contracts with the U.S. government. • This ban puts BP at a major competitive disadvantage.

  50. The AFI Strategy Framework

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