Strategic Management MGMT S-5000 (32759), Summer, 2011

1. Strategic ManagementMGMT S-5000 (32759), Summer, 2011 Tuesday/Thursday, 3:15-6:15 PM, Sever 203 Sharon A. Mertz

2. Topics: • Welcome • Course Outline & Overview • Evaluation (refer to syllabus for guidance): • Class Participation – 20% • Case Analyses (2 x 15%) – 30%. Work with a partner or individually. • Group Research Projects/Presentations – 20%. • Final Case - 30% - individual effort • Expectations • Introducing Strategic Management • Group Work S-5000 – Strategic Management

3. Chapter 1Introducing Strategic Management

4. 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

5. UNDER ARMOUR AT A GLANCE 1996 2006 Revenues $17,000 $430,000,000 57,300,000 Net Income 0 1,800,000,000 Equity Value 0 Under Armour, HeatGear, ColdGear, AllSeasonGear, LooseGear, Click Clack Brands and Trademarks Kevin Plank’s Vision To become the world’s #1 performance athletic brand

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

7. THE MILITARY ROOTS OF STRATEGY “The individualist without strategy who takes opponents lightly will inevitably become the captive of others.” – Master Sun

8. 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

9. BUSINESS STRATEGY AS AN ACADEMIC DISCIPLINE • Relatively recent – gained significant traction since the 1960’s • Many perspectives – Whittington provides one example: Internally focused Externally focused Source: Whittington, What is Strategy - and does it matter? (2005)

10. 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

11. 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?

12. ADDITIONAL CHALLENGES AND OPPORTUNITIES CONFRONT DIVERSIFIED BUSINESSES In which businesses will we compete? How can the corporate parent added value to the various lines of business? How will diversification or entry into a new industry enable us to compete in our other industries?

13. 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

14. 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

15. 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

16. 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 Staging • Secure cost advantage by being willing and able to perform key tasks differently • One type of plan • JFK home base • Secondary location Economic logic

17. 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

18. 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

19. 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

20. 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

21. 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

22. INTERNAL AND EXTERNAL DIMENSIONS OF THE DYNAMIC PERSPECTIVE • Competitive advantage can shift quickly in unstable markets • External dimension: Useful for “high velocity” markets, or examining industriescharacterized by multi-market competition. • Internal dimension: Identify which firm resources and capabilities enable corecompetency of embracing continuous or disruptive change

23. Chapter 2Leading Strategically Through Effective Vision and Mission

24. OBJECTIVES Explain how strategic leadership is essential to strategy formulation and implementation 1 Understand the relationships among vision, mission, values and strategy 2 3 Understand the roles of vision and mission in deter-mining strategic purpose and strategic coherence 4 Identify a firm’s stakeholders and explain why such identification is critical to effective strategy formula-tion and implementation Explain how ethics and biases may affect strategic decision-making 5

25. PULLING A USD 15 BILLION COW OUT OF A DITCH Xerox reaches profitability Mulcahy takes over The fall from the nifty 50 She leads a turnaround • Xerox introduces the Xerox 914 copier in 1959. This copier transformed the work place • Xerox was charter member of the “nifty 50”-50 stocks most favored by institutional investors • Since 1970s, however, Xerox has been crippled by competition (mostly Japanese) • October 2001, Xerox reports first quarterly loss in16 years. Mulcahy is not obvious choice for top position • She lacks product development and financial expertise • She gets it because the board has confidence in her “strategic mind”. • Refines Xerox vision and reminds people of core values • Aligns operation with the refined mission and values • Sells Xerox’s China and Hong Kong operations and half of a stake in a joint venture with Fuji • Closes down inkjet business • Annual expenses cut by USD 1.7 billion • Sold USD 2.3 billion worth of non-core assets • Reduced long-term debt to USD 9.2 billion from USD 15.6 billion • Xerox returns to profitability in 2002, generating USD 1.9 billion in operating cash flow and USD 91 million in net income on USD 15.8 billion in sales

26. STRATEGIC LEADERSHIP – THE BASIC RESPONSIBILITY OF THE CEO Leadership: Strategic leadership: The task of exerting influence on other people’s pursuit of goals in an organizational context Managing an overall enterprise and influencing key organizational out-comes, such as company wide performance, competitive superiority, innovation, strategic change, and survival

27. SOME BUSINESS LEADERS BECOME CELEBRITIES " "I can't think of anything that isn't cloud computing with all of these announcements. The computer industry is the only industry that is more fashion-driven than women's fashion. Maybe I'm an idiot, but I have no idea what anyone is talking about. What is it? It's complete gibberish. It's insane. When is this idiocy going to stop?" "Larry Ellison's Brilliant Anti-Cloud Computing Rant" The Wall Street Journal, 25 September 2008

28. Interpersonal roles • Figure head • Leader • Liaison • Informational roles • Monitor • Disseminator • Spokesperson • Decision roles • Entrepreneur • Disturbance handler • Resource allocator • Negotiator EXECUTIVE ROLES Formal authority and status

29. LEVEL 5 LEADERS Capabilities Build greatness through combination of will and humility Level 5leaders Can lead a group to superior levels of performance Level 4 leaders Organize people resources to accomplish predetermined objectives Level 3 leaders Work effectively with others as a member of a team to achieve group objectives Level 2 leaders Make individual contributions through talent and work ethic Level 1 leaders

30. TWO ATTRIBUTES OF LEVEL 5 LEADERS • Being someone • who prefers to share credit rather than hog it • who tends to shun public attention, • act with calm determination, and • exercise ambitions on the company’s behalf rather than one’s own • The ability to translate strategic intent into the resolve needed to pursue a strategy • and usually to make hard choices over a period of time Professional will Professional modesty “You can accomplish anything in life, provided that you do not mind who gets the credit.” - Harry S. Truman

31. WHAT DOES IT TAKE TO BE A CEO? An Ivy league MBA? Charisma? There is little consensuson whether personality or background matters more International management experience? Integrity

32. CRITERIA OF AN EFFECTIVE TOP-MANAGEMENT TEAM • The team responds to a complex and changing environment. • 2. The team can manage the needs of interdependent but often diverse units, arenas, or functional areas. • 3. The team has a valuable and effective social network. • 4. The team is able to develop a coherent plan for executive succession.

33. Research began in the late 1800’s: Durkheim and Tönnies • Tönnies : social groups exist as personal or direct social ties, either linking individuals who share beliefs (Gemeinschaft) or impersonal, formal and instrumental social links (Gesellschaft) • Early 20th century: Simmel, explores the structural patterns of social interactions • 1930’s onward: interest grows at institutions such as Harvard, University of Chicago, University of Toronto, and others. • The area is researched by many; a few major contributors and example research topics: • Granovetter: The Strength of Weak Ties • Freeman: Visualizing Social Networks (importance of imagery in network research) • Wellman: Computer Networks as Social Networks; Internet Effect on Social Capital “SOCIAL” IS NOT A NEW PHENOMENON “Social” is Not a New Phenomenon

34. VISION, MISSION AND STRATEGY Strategy The central, integrated, externally-oriented concept of how the firm will achieve its objectives. Consists of 5 elements: arenas, vehicles, differentiators, staging, and economic logic Vision and Mission Strategic Goals and objectives • Fundamental purpose • Values • View of future • Specific targets • Measurable outcomes

35. VISION – USES OF AMBITION AND AMBIGUITY Sony’s vision in early 1950’s: “becoming the company that most changes the worldwide image of Japanese products as being of poor quality.” • Vision statements • generally express long-term action horizons, • are ambitious and force the firm to stretch. • their ambiguity allows flexibility for changing strategy or implementation tactics CitiBank’s vision in 1915: “the most powerful, the most serviceable, the most far reaching world financial institution the world has ever seen.”

36. EXAMPLE – AN EXCERPT FROM THE SAP MISSION STATEMENT Our mission is to help the world run better in order to create enduring prosperity for people everywhere. We help customers around the globe perform at a significantly higher level of effectiveness and efficiency by enabling closed-loop performance optimization to achieve profitable, sustainable growth. To succeed, we strive to build from our established leading position in the business software market and accelerate business and IT innovation for firms and industries. In reaching for this goal, we are also contributing to global economic development on a grand scale. Sap 20F, March, 2009

37. Wal-Mart Grow sales and profits by 70% per year Ryanair Be Europe’s largest airline in 7 years Matsushita To become a “super manufacturing company” VISION ANCHORED IN GOALS AND OBJECTIVES Vision Examples Goalsand objectives

38. Arenas Strategic coherence is • The symmetrical co-alignment of the five elements of a firm’s strategy • The congruence of policies in functions (e.g., finance, production, marketing) with these elements • The overarching fit of various businesses under the corporate umbrella Economic logic Staging Vehicles Differentiators STRATEGY COHERENCE Congruence

39. BENEFITS OF USING STAKEHOLDER ANALYSIS • Can use the opinions of the most powerful stakeholders to shape your strategy and tactics at an early stage. • Gain support from powerful stakeholders to help win more resources. • Can ensure that stakeholders fully understand what you are doing and understand the benefits of your project. • Can anticipate what people’s reactions to your project may be and build actions into the plan that will win people’s support.

40. After identifying stakeholders ask • Have I identified any vulnerable points in either the strategy or its potential implementation? • Which groups are mobilized and active in promoting their interests? • Have I identified supporters and opponents of the strategy? • Which groups will benefit from successful execution of the strategy and which may be adversely affected? • Where are various groups located? Who belong to them, and who represents them? Steps in identifyingstakeholders • Determine influences on strategy formulation decisions • Determine stake-holders power and influence over strategy execution decisions • Determine the effects of strategic decisions STAKEHOLDER ANALYSIS Stakeholders: Individuals or groups who have an interest in an organization’s ability to deliver intended results and maintain the viability of its products and services

41. MAPPING STAKEHOLDER INFLUENCE AND IMPORTANCE Importance of Stakeholder Influence ofstakeholder Little/Noimportance Moderateimportance Significant importance Unknown Unknown Little/Noimportance Moderateimportance Significant importance

42. STAKEHOLDER MANAGEMENT PLAN

43. Governance Sets the Boundaries CorporateGovernance – the role of owners, directors, and Managers in making corporate decisions • Governance frameworks focus on internal control: • The reliability and integrity of (financial) information • Compliance with policies, plans, procedures, laws and regulations • The safeguarding of assets • The economical and efficient use of resources • The accomplishment of established objectives and goals for operations or programs

44. New strategy –A new means to accomplish goals Implementation –Executing new strategy to realize goals ETHICS AND BIASES Have any potential biases clouded our decision-making process? Is the decisionethical? • Authority structures • Incentive systems • Role of corporate governance • Common illusions about ourselves (e.g., favorability optimism , control) • Escalating commitments • Self-serving fairness bias • Overconfidence bias • Ethnocentrism and stereotyping • Risk assessment