Chapter 1 Introducing Strategic Management

1. Chapter 1Introducing Strategic Management

2. OBJECTIVES • Understand what a strategy is and identify the difference between business-level and corporate-level strategy 1 • Understand the relationship between strategy formulation and implementation 2 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

3. Rapid growth, driven by end-based locations and company-controlled factories • Financial trouble; sells off all non-retail businesses • Takes control of production and distribution • A Firm’s per-formance is directly related to the quality of its strategy and its compe-tency in im-plementing it • Expands into banking, investments, real estate services, and insurance • Perfects model; grows; expands into new markets (international) and store concepts (Sam’s clubs) • Dizzying growth A TALE OF TWO STORES • Experts believe Sears way was the only way to compete “The paragon of retailers” • Sears launches catalog business • Acquired by KMart • 1970 • 1891 • 1924 • 1960 • 1980 • 1990 • 2000 • 2005 • Moves into on-premise retailing/General Robert Wood takes over • Sam Walton opens first Wal-Mart with focus on low-prices • 1962 • 1970 • 1980 • 2000 • 30 stores located in “one-horse towns which everybody else was ignoring”; Sam Walton • Invests $500 million in inventory management technology

4. TWO RETAILERS AT A GLANCE • Sears • Wal-Mart • Year founded • 1891 • 1962 • 600 • 5289 • Stores 1980 • Stores 2004 • 864 • 2026 • $1,643 million • $285,222 million • Revenues 1980 • Revenues 2004 • $25,194 million • $36,100 million • 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) • Net profits 1980 • Net profits 2004 • Market capitalization 1980 • Market capitalization 2004 • USD 4.8 billion • USD 12.2 billion • USD 1 billion • USD 200.2 billion

5. A TALE OF TWO RETAILERS – PERFORMANCE MEASURES • USD millions

6. THREE OVERARCHING THEMES   • Implementing a good strategy is at least as important as creating one, yet many managers give too little thought to implementation • Strategic leadership is responsible for • making substantive resource allocation decisions and • developing key-stakeholder support of the strategy • To succeed, • the formulationof a good strategy and its implementa-tion should be inextricably connected • Firms and industries are dynamic in nature  • Strategic leader-ship is essential if a firm is able to both formulate and imple-ment strategies that create value • We need to see a firm’s competitive position, not as a snapshot, but as an ongoing movie

7. STRATEGY • Strategos: “the general’s view” • Holistic “big picture” • General • Lower officer (e.g., supply logistics infantry, heavy armored vehicles) • Tactical details

8. THE STRATEGIC MANAGEMENT PROCESS • Strategic analyses • Internal • External • Strategy • Vision and mission • Arenas • Vehicles • Differentiators • Staging • Economic logic • Implementation levers • and • Strategic leadership • Fundamental organizational purpose • Organizational values • The central, integrated, externally oriented concept of how a firm will achieve its objectives

9. 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?

10. STRATEGY AND IMPLEMENTATION ITERATE • WAL-MART EXAMPLE • Compete as discount retailer in rural markets • Leverage inventory and sourcing systems to be low-cost leader • Strategy: • The process of deciding what to do • Implementation: • The process of performing all the activities necessary to do what has been planned • Invest heavily in organizational structure, systems, and processes

11. By 1984, 95%of Intel revenue came from the microprocessor segment • Focus on micro-processor segment UNPLANNED ACTIONS CAN DRIVE STRATEGY • Intel’s original focus (1970s & 1980s) • Design and manufacture of Dynamic, Random-Access Memory Chips (DRAM) • Unplanned experimental venture to make microprocessors for Busicom, a Japanese calculator maker

12. Arenas • Where will we be active? ( and with how much emphasis?) • Which product categories? • Which channels? • Which market segments? • Which geographic areas? • Which core technologies • Which value-creation strategies? • Staging • What will be our speed and sequence of moves? • Speed of expansion? • Sequence of initiatives • Vehicles • How will we get there? • Internal development? • Joint ventures? • Licensing/franchising? • Experimentation? • Acquisitions? • 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? • Differentiators • How will we win? • Image? • Customization? • Price? • Styling? • Product reliability? • Speed to market? BUSINESS STRATEGY DIAMOND • Arenas • Economic logic • Staging • Vehicles • Differentiators

13. PROFITABILITY AND MARKET VALUATION OF US AIRLINE INDUSTRY • Profitability • Market valuation

14. Objective • To “bring humanity back to air travel” JET BLUE STRATEGY • Low fare commercial air carrier • Underserved but over-priced US cities • Arenas • Start from scratch and achieve all growth internally (i.e., do not purchase a regional airline) • Vehicles • High level of service compared to low fare competitors (e.g., leather seating, satellite TV) • Differentiators • Grow from one route between two cities to serving 20 cities in just 3 years • Strategy • Secure cost advantage by being willing and able to perform key tasks differently • One type of plan • JFK home base • Secondary location • Economic logic

15. 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) GOALS OF STRATEGY IMPLEMENTATION

16. 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

17. FRAMEWORK FOR STRATEGY IMPLEMENTATION • Key Factors of Strategy Implementation • Implementation levers • Organizational structure • Systems and processes • People and rewards • Realized • and • Emergent • Strategies • Intended • Strategy • Strategic leadership • Lever- and resource-allocation decisions • Decision support among stakeholders

18. IMPLEMENTATION LEVERS • Implementationlevers • Description • 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 • Organizationalstructure • Systems are all the organizational processes and procedures usedin daily operations. These include control and incentive systems, resource‑allocation procedures, information systems, budgeting,and distribution • Systems andprocesses • 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 • People andrewards

19. 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? COMPETITIVE ADVANTAGE

20. THREE PERSPECTIVES OF COMPETITIVE ADVANTAGE • Internal • External • Dynamic • 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 • 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 • 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

21. 1 • Understand what a strategy is and identify the difference between business-level and corporate-level strategy 2 • Understand the relationship between strategy formulationand implementation 3 • Describe the determinants of competitive advantage 4 • Recognize the difference between a fundamental and adynamic competitive advantage 5 • Understand why we study strategic management SUMMARY

22. 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? • ?

23. 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.

24. 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?