Agenda: January 10, 2003

1. Agenda: January 10, 2003 • Introduction • Syllabus • Class Overview / Intro to Strategy • What is Strategy? (Porter article) • Current Events

2. Business Strategy and Policy • Notecards • Name • Phone Number • E-mail Address • Major & Class Standing • Career or Personal Interest(s) • Work Experience (industry, length of time)

3. Business Strategy and Policy BA 495 Section 06 Friday 1:00-4:50 Room BA 130

4. What is strategy? • It’s the coherent development of a business model, where you first select an industry, and then decide how to compete within the industry. • It coordinates all the functional areas into one main plan • In this context, the objective of strategy is to create and sustain competitive advantage for the firm.

5. Ideally, • You should have a good “fit” between your internal capabilities and the external requirements from the environment. • Your strategy should take advantage of your strengths.

6. What is this course all about? Strategic Competitiveness Achieved when a firm successfully formulates and implements a value-creating strategy Sustained Competitive Advantage Occurs when a firm develops a strategy that competitors are not simultaneously implementing Provides benefits which current and potential competitors are unable to duplicate Above-Average Returns Returns in excess of what an investor expects to earn from other investments with similar risk

7. Competitive Environment Industry Environment Technology Finance Strategy Mktg. Ops National/Int’l Economies GovernmentRegulation Sales H.R. Related Industries Other Competitors Strategy Relates A Business To Itself and Its Environment

8. Model of Strategic Management Analysis/Scanning External Analysis (Chapter 3) Internal Analysis (Chapter 4) Strategy Formulation Business Level (Chapter 5) Corporate Level (Chapter 6) Functional Level (Chapter 7) Strategy Implementation Organizing (Chapter 8) Staffing (Chapter 9) Evaluation & Control Metrics (Chapter 10)

9. Challenge of Strategic Management Only 16 of the 100 largest U.S. companies at the start of the 20th century are still identifiable today! In a recent year, 44,367 businesses filed for bankruptcy and many more U.S. businesses failed Competitive success is transient...unless care is taken to preserve competitive position

10. An Example: Gap Inc. • Founded in 1969, Gap Inc. is a global specialty retailer selling apparel, personal care and other accessories for men, women, and children • For the 26 weeks ended 7/29/00, net sales rose 20% to $5.8 billion. Net income rose 6% to $419.4 million and three different “brands,” including: • Gap • Banana Republic • Old Navy • Employs over 110,000 people worldwide and operates 2,900 stores in the United States, Canada, France, Germany, Japan and the United Kingdom • What’s the strategy behind this business? How do you explain its success? How do you explain its recent stumble?

11. Challenges Facing Gap Inc. • Overall Environment? • How is the apparel retailing business evolving, both in terms of its customers, competitors, etc.? • Specific Challenges? • What sorts of challenges do these changes present to Gap’s current strategy? • What to do? • What options does Gap Inc. have for dealing with these challenges? • How to implement? • What strategy should Gap Inc. employ to maintain its competitive advantage, and how does the organization need to change to implement this strategy?

12. What is Strategy? (Michael Porter)

13. What makes good strategy? (Porter’s Point) • Operation Effectiveness = Good strategy ? • NO !! • Outperform your rivals in similar activities. • Hypercompetition • JIT, TQM, Outsourcing (imitable??) Long-term Time Horizon Present

14. Porter’s Article: Operational Effectiveness vs. Strategy • Operational Effectiveness • Performing similar activities better than rivals perform them (charge higher price or reduce cost) • Possibility of diffusion • Strategic Positioning • Performing different activities from rivals or performing similar activities in different ways • Unique activities

15. Total Quality Management • Emphasis on organizational commitment to • Customer • Continuous improvement of every process • Data-driven, problem-solving approach • Empower employees and teams

16. high Productivity Frontier Nonprice buyer value delivered low high low Relative Cost Position Productivity Frontier

17. Appraising Strategy and Achieving Competitive Advantage • So, a strategy is a plan or pattern of choices which results in a competitive advantage • How to judge the level of competitive advantage? • Interest Rate (NPV>0) • Industry average level • Closest competitor

18. Trade-Offs • Gains in one area can be achieved only at the expense of another area. • Trade-offs come about due to inconsistencies in image or reputation What type of trade-offs can we come up with? How do you determine which decision is best for the organization?

19. Strategic Positioning • Variety-based positioning • Based on product or services offering rather than customer segmentation (Jiffy-lube) • Needs-based positioning • Target customer strategy (Bessemer Trust vs. Citibank) • Access-based positioning • Based on set activities needed to reach market (Carmike)

20. Appraising Strategy and Achieving Competitive Advantage • So, a strategy is about combining activities that fit each other • What kinds of strategies are likely to achieve competitive advantage? • One aspect of a good strategy is that it is “coherent.”

21. Finance Oper. Mktg. Strategy Acctg. H.R. The First Rule of Strategy • A Good Strategy Is “Coherent.” • Functional pieces of strategy support the whole • Southwest Airlines, American, & Continental Airlines

22. Coherence • The idea that that the firm coordinates its activities such that they complement and reinforce each other. • 1st Order Fit – Simple consistency between functional activities • 2nd Order Fit – Activities are reinforcing • 3rd Order Fit – Optimization of effort Poor performance in one area will bring down performance in others.

23. Coherence and Sustainable Competitive Advantage • Strategic positions built on a coherent systems of activities are far more sustainable than those built on individual activities. Competitive Advantage + Fit or Coherence + Sustainability

24. Discussion Questions • How does only flying 737s lower Southwest’s costs? • Why Can’t Continental Imitate Southwest? • What does Southwest miss? In other words, how is Southwest limited by its own strategy?

25. How does only flying 737s lower Southwest’s costs? • Lower maintenance costs: mechanics can better specialize, less inventory on hand • Lower training costs—pilots only have to learn one set of controls, • Quicker turnaround times—Southwest gets one additional “flight” per day from each aircraft, lowering capital costs. • Less scheduling problems • Volume purchasing from Boeing

26. The 737s guide other strategies too! • Southwest only flies direct, short flights. • No lunches (less cleanup costs too!) • Expansion is tied to existing locations • More opportunity for “return flights” • Southwest avoids hubs if possible.

27. Why Can’t Continental Imitate Southwest? • Inconsistent image or reputation • Frequent flyer program • Trade-offs among different activities • Hubs too busy for quick turn around • Lose focus • Internal Coordination and Control • Commission for travel agents

28. Southwest Airlines Low Price Short Routes No Frills Point-to-Point One Aircraft - Boeing 737 High Aircraft per Route No Meals Flexible/ Lower Staffing Price-sensitive customers Continental Airlines Premium Priced Short, Long, & Int’l Variety Hub & Spoke Multiple Aircraft Low Aircraft per Route Meals & Service Higher Staffing (Unions) Comfort-sensitive customers Strategic Coherence -The Logic of How The Business Fits Together

29. Why does Southwest Succeed? This is Porter’s point • Southwest succeeds because it does not try to become United Airlines. • It will never be a “luxury leader”; Southwest leaves that to others. • Southwest succeeds because its strategy is coherent and thus hard to imitate.

30. What does Southwest miss? • Doesn’t shop around for aircraft—Boeing has a captive customer • No international expansion (except maybe Canada and Mexico) • Not as much first class business—mostly tourists and cheap companies. • Can’t hop into “hot markets” unless they’re close by. Expansion comes slowly.

31. Growth Trap • What does Porter term the growth trap or “growth imperative”? • How does a company go about reconnecting with its core strategy? (hint: see pg. 76) • What are the “hot features” that Porter discusses?

32. Role of Leadership • How can the leaders of an organization instill discipline? • How can they communicate strategy? • How can they communicate and drive changes in core strategies?

33. In Summary, • Improving operational effectiveness does not necessarily mean it represents the strategy. • The strategic agenda involves trade-offs. • Strategies need constant attention; its enemies are distraction and compromise. • Coherence is critical to sustained competitive advantage. • A strategy must be adequately communicated and reinforced.

34. Current Events • Approximately 10 minutes • Determine relevant news item/company • Examine current strategic elements • Evaluate performance and direction • Facilitate class discussion • Summarize

35. Cases & Industries • Wal-mart Stores, Inc. Retail Industry • RCA Records Entertainment Ind. • American Airlines Transportation Ind. • Airborne Express Logistics/Overnight Delivery

36. Verizon Comm Stock History

37. Company Profile and Outlook Revenue EPS

38. Next Time: Concept of Strategy • Current Events • Read Chapter 1: Basics of Strategic Management • Read Chapter 2: Corporate Governance • Team Project Defined • Assign Case #1: Wal-mart Stores, Inc. WEBSITE: www.sba.pdx.edu/faculty/stephens/ss.html