An Overview of Strategy: Past, Present, and Future

An Overview of Strategy: Past, Present, and Future James Oldroyd Kellogg Graduate School of Management Northwestern University J-oldroyd@northwestern.edu

Overview of Strategy • Definition and Brief History of Strategy • Industry Strategy • Firm Strategy • Business Unit Strategy • Current Trends in Strategy • Business Building • Growth Short-term and Long-term • Conclusion

Are these Strategies? • “Become a $125 billion company by the year 2000” (1990) • “Crush Adidas” (1960s) "A PC on every desktop and in every home," to the broader (and, yes, even more ambitious) "Great software anytime, anyplace and on any device" • “Become the company most known for changing the worldwide poor-quality image of Japanese products” (1950s) • “Become the Harvard of the West” (1940s)

What is Strategy? The science and art of military command exercised to meet the enemy in combat under advantageous conditions • Merriam Webster • Dictionary Leverage of core competence to achieve competitive innovation (changing the rules of the game). It as about being different. • Michael Porter Strategy is about being different. It means deliberately choosing a different set of activities to deliver a unique mix of value • Hamel and Prahalad The use of valuable, rare, non-substitutable, and appropriable resources and capabilities to create sustainable advantage • Resource-based view

Strategy as ArtThe Military Analogy • Von Clausewitz view of strategy: • Strategy was not a formula. Detailed planning always failed due to change events, imperfections in execution, and the leadership of the opposition. • Strategy was the art of the broken-field runner; strategy was not a lengthy plan, but an idea that evolved through changing circumstances. • Strategy involved the instinctive savvy of the best generals

Demand for Strategy and the Rise of Strategy as Science Single Business Firms Strategy as an art is no longer adequate Post WWII Multi-divisional Firms New Managerial Problems: What to buy? What to sell? How to allocate resources? How to achieve synergy? Intuition and experience alone cannot manage the multi-divisional firm

Strategy is…. • What really makes the difference between success and failure? • What will factors will change in the future? • What Customers groups served? • What customer needs do you satisfy? • How might your markets change with time? • Existing and potential competitors • SWOT • Unique core competencies • Assumptions • Future moves • What do you do well compared to competitors? • What do you need in the future? Kenneth Andrews, The Concept of Corporate Strategy” (pp.18-19).

Three Levels of Business Strategy Industry Firm Business Unit • Which Business Units? • Business Unit Boundaries • Managing Cross Business Synergies • Choose Your Sandbox • Business Definition • Firm Resources Strategic Advantage

Industry Strategy Industry Firm Business Unit • Which Business Units? • Business Unit Boundaries • Managing Cross Business Synergies • Business Definition • Firm Resources • Choose Your Sandbox Strategic Advantage

Average Annual Returns of U.S. Manufacturers 1970-1990 • ROEROAROS • Drugs 21.4% 11.8% 13.1% • Food and Kindred Products 15.2 6.6 3.9 • Chemicals and Allied Products 15.1 7.5 7.2 • Fabricated Metal Products 12.3 5.7 3.7 • Motor Vehicles and Equipment 11.6 5.6 3.7 • Textile Mill Products 9.3 4.3 2.5 • Iron and Steel 3.9 1.5 1.3 Source: Anita McGahan, Harvard Business School

A Cautionary Note People began to notice problems with the industry approach… Year Rest of World Industry Year 2% Industry • In the U.S., corporate strategy is typically the icing on the cake, not the cake itself • Business units must be competitive on their own merits • …in attractive industries • But the icing can make the decision difference between a good cake and a bad one U.S. 18% 3% 10% Corporate Business Transient Transient Group parent 42% 11% 46% 4% Business Firm segment 34% 30% In much of the rest of the world, corporate strategy is more prominent Membership in a diversified entity has a larger effect on profitability The effect on profitability is more likely to be positive Source: Tarun Khanna and Jan W. Rivkin, “Estimating the Performance Effects of Business Groups in Emerging Markets,” Strategic Management Journal, 2000 Countries: Argentina, Brazil, Chile, India, Indonesia, Israel, Mexico, Peru, the Philippines, South Africa, South Korea, Taiwan, Thailand, and Turkey Source: Anita M. McGahan and Michael E. Porter, “How Much Does Industry Matter Really?” Strategic Management Journal, 1997

Persistence of Superior Returns by Industry The Typical cross-country correlation in in dusty profitability is extremely weak Source: Tarun Khanna, Harvard Business School

Persistence of superior returns 1980-1989 Source: Geoff Waring, “Industry differences in the persistence of Firm-specific Returns” 1996

Firm Strategy Firm Industry Business Unit • Which Business Units? • Business Unit Boundaries • Managing Cross Business Synergies • Choose Your Sandbox • Business Definition • Firm Resources Strategic Advantage

Value Creation and a Firm’s Positioning Willingness to Pay Customer Firm Total value created Supplier Supplier opportunity cost

Willingness to Pay Value Captured by Customer Price Value Captured by Firm Cost Value Captured by Supplier Supplier opportunity cost Value Division Customer Firm Supplier Added Value is the total value created with the firm in the game – total value created without the firm in the game or the value that would be lost to the world if the firm disappeared. A firm cannot capture more than its added value.

Differentiation Low Cost Mom and Pop Store K-mart Wal-mart Goldman Sachs Merrill Lynch Examples of Added Value Dual Advantage Willingness to Pay Supplier opportunity cost Burger King McDonald’s

Generic Strategies Product Leadership Faster Closer Customer Intimacy Operational Excellence Better Source: Adapted from Treacy and Wiersema, The Discipline of Market Leaders. Perseus Books. 1995

Value Added and Competitive Advantage Competitive Advantage Willingness to Pay • Added Value - Goal is to drive a wedge between willingness to pay and (supplier opportunity) cost Value Captured by Customer Value Added Price Value Captured by Firm Cost Value Captured by Supplier Supplier opportunity cost • Problem: a firm must often incur higher costs to deliver a better product or service

Strategies for Shaping the Wedge Value Value Added Strategy Sony Strategic Moves High Segmentation Strategy Mercedes Charles Schwab Industry Pressures Price Process Innovation Wal-mart Strategic Moves Low Service Innovation DELL Coca Cola Low High Cost-to-Service Source: Adapted from “Beating the Commodity Magnet” V. Kasturi Rangan and George Bowman. Harvard Business School Note 1994

Mini-Case: Marketing Strategy at Delta In the mid 1980s Delta’s market researchers found that customers (particularly business customers) were strongly influenced to choose a particular airline by the airline’s frequent flyer program. Consequently, to motivate customers to choose Delta, they teamed up with American Express (an exclusive arrangement) to offer a special program: customers could receive triple miles if they would fly on Delta and purchase the tickets using the American Express card. How would you evaluate Delta’s strategy? (Good or bad?)

Constraints of Strategy • Environment • Pressures • Constraints • Opportunities • Stability or Change • Resources • Availability • Future scarcity • History • Key Events • Organizational Change

Business Unit Strategy Business Unit Industry Firm • Choose Your Sandbox • Business Definition • Firm Resources • Which Business Units? • Role definition and integration • Business Unit Boundaries • External and Internal • Managing Cross Business Synergies Strategic Advantage

Relative Share Low High High Star ? Relative Share Market Growth Rate Cash Cow Problem Child Dog Low Which Business Units? Focus on Market Share Boston Consulting Group Portfolio Model

Which Business Units? General Electric Model Business Unit Position High Med Low Build Industry Attractiveness Hold Low Med High Harvest

Solution • Regard match of business portfolio to markets as temporary • Pay attention to SCALE of businesses as well as focus • Patching executive at multibusiness level • Economies of scale AND agility • Traditional RV Market Segments • Honda Segments • Minivans • Odyssey: • Shorter than a minivan but bigger than station wagon • Station wagon • Criteria: • Compact-cum-wagon with “Godzilla” styling • Compact sedans • CR-V: • Similar to Jeep Cherokee but smaller and built on the Honda Civic platform • Sport utility vehicle Business Unit Boundaries Common Complaints • Our business are organized around a market and when a market changes the business unit fails. • We miss opportunities that fall between business units. • Our organization is set in stone, it is impossible to change. Source: Adapted from Kathy Eisenhardt, Stanford, 2002

Example – • 1994 • 1996 • 1998 • Large customers • Large companies • Global enterprises • Large companies • Midsize companies • Small customers • Government and education • Midsize companies • Federal • Small customers • State and local • Education • Small companies • Consumers Source: Adapted from Kathy Eisenhardt, Stanford, 2002

Solution • A few temporary collaborations with exceptional payoffs • Manage NUMBER of collaborations, not just focus • Senior managers set context for collaboration, businesses decide • Synergies AND individual business success • sharing movie characters across businesses • Selective collaboration (e.g., Disney characters not shared with Touchstone) • Senior executives set collaborative context (e.g., synergy meetings, calendar, synergy managers, training boot camp), but business managers make the choices • “Key to earning a big return is to replicate knowledge” – John Browne, CEO • SBUs belong to 1 of 4 peer groups for knowledge exchange, facilitated by electronic yellow pages • Participation is voluntary and comes out of SBU budget Business Unit Synergies Common Complaints • Senior management wants cross-business synergies, but is unsuccessful • Orchestrating collaboration across businesses is a time sink Source: Adapted from Kathy Eisenhardt, Stanford, 2002

Weak tests: Does the portfolio outperform a benchmark portfolio of otherwise comparable but focused companies? Is the business better off as part of the corporation than it would be by itself? Stronger tests: Does each business unit within the corporation outperform comparable focused companies? Is the business better off as part of this corporation than it would be under any other parent or organizational arrangement? Tests of Corporate Synergy

Overview of Strategy • Definition and brief history of Strategy • Industry Strategy • Firm Strategy • Business Unit Strategy • Current Trends in Strategy • Business Building • Growth Short-term and Long-term • Conclusion

Business Building Imperative What Percent of Companies will fall out of the S&P 500 by 2020? Answer = 50% Percent of Market Capitalization in December 1999 by Newly Created Businesses Within the Companies from 1990-1999. 95 90 50 CORNING Fiber optics Global Services Handsets Source: Adapted from McKinsey and Company, 2002

The Role of Corporate and The Business Units • Create Corporate primary focus is to create, exchange, and destroy assets Business Unit’s Primary focus is to operate assets • Operate • Trade/ destroy Source: Adapted from McKinsey and Company, 2002

General Electric’s evolving business portfolio mix • Revenue breakdown by business • Other products 100% 90% • Broadcasting 80% 70% • Financial services 60% 50% • Aerospace, aero-engines, materials, technical support 40% 30% 20% 10% • Electrical products 0% 1997 1977 1987 Business Building Requires a Shift in Focus Acquire/develop options on the periphery Create More time • Operate • Reduce time spent managing operations Less time • Trade/ destroy Cannibalize/sell developed businesses More time Source: Adapted from McKinsey and Company, 2002

Growth as a Strategic Imperative No company ever shrank to greatness Our shareholders want profit improvement very soon. In the short term, the only solution is to get rid of people and assets.” • Wayne Calloway, PepsiCo (Gertz & Baptista) Every dim-witted idea I see is now dressed up as a growth initiative.” Fortune 1000 CEO You can’t save your way to prosperity” Fortune 500 CEO

Some Myths of Growth • Growth is common(compound growth for F500 1983-1993, adjusted for inflation, was -.33%) • Big companies can’t grow(virtually no correlation between firm size and growth rate) • We’re in a “dead industry”(some companies in dead industries have recorded double-digit growth rates) • “If it’s a choice between investing in a good company in a great industry, or a great company in a lousy industry, I’ll take the great company in the lousy industry any day …It’s the company, stupid.” Peter Lynch • Most large company growth is created through acquisition(Nucor, MBNA internal growth; Traveler’s was a sum of a series of acquisitions) • Cost cutting sets the stage for growth (only 7% of profitable growers were cost cutters in prior period) Source: Jeff Dyer, Brigham Young University, 2001

Alternative Modes of Growth Internal Alliances • Geographic • Related product • New opportunities • Proliferation • Extension • New venture • Non-equity • Equity • JV • Vertical • Horizontal Acquisition • Vertical • Horizontal • Diversification • Partial • Takeover

Solution • Genetic evolution • Traditional businesses (and people) are combined with new approaches • New businesses refresh traditional ones • Traditional businesses are occasionally re-combined • Multiple growth paths are traveled • Existing businesses are culled • Old AND new • Lexus entry into luxury market, built on • Discarded, experimental, midsize, Asian market product platform • New dealerships, brand images, styling, technology • Rearchitected selected engineering features • Refreshed lower priced name plates with Lexus technology • Sophisticated combination of mutations, recombinations, and refreshers • Combined camera skills (optics technology, management of dealers, high-volume assembly) with new copier product • Combined print engines from copiers with new laser printer product and OEM channel into print engine business • Refreshed copier business with sophisticated control technology from laser printers • Recombined dealer management, high-volume assembly, copier and laser printer technology to launch fax machines business • Diversified into high-volume, low-cost, in-store banking outlets with service-training of sales force from theme park companies • Newly trained salesforce re-vitalized traditional branch network Short-term Growth Common Complaints • New businesses suffocate in shadow of legacy ones • New businesses thrive while traditional businesses languish • Roadblocks on previously successful growth paths Source: Adapted from Kathy Eisenhardt, Stanford, 2002

Solution • Probe the future • Wide-variety of low-cost probes • Manage NUMBER of probes, not just type. More probes, more variety with more uncertainty • Create identity of company, not vision of industry • 15 month intuition, 5 month plan, 5 week schedule • “You’ve got to make sure you have feelers out to see when things are about to achieve critical mass” - Bill Gates, COB • Small investments in 3 video compression technologies • Both internal projects and “Blue Sky” projects • Organic experiments w/futures trading, Market Buzz, AdvisorSource • Alliances w/Goldman Sachs for IPOs, Great West Life for direct life insurance • In-house futurists • “You’ve got to experiment…strategy is about buying options…then picking the best ones” – John Browne, CEO • Drilling experiments on Andrew oil field led to revolutionary horizontal drilling technique • Limited JV with Safeway to experiment with integrated food and fuel convenience stores Source: Adapted from Kathy Eisenhardt, Stanford, 2002 Long-term Growth Common Complaints • Strategic plans are created, then ignored • Strategic plans are wrong • Short-term performance takes priority over future thinking

Industry Firm Business Unit • Choose your sandbox • Which business units? • Business unit boundaries • Managing cross business synergies • Business Definition • Firm Resources Strategic Advantage The Synthesis of Strategy the science and art of military command exercised to meet the enemy in combat under advantageous conditions Downsizing Leverage of core competence to achieve competitive innovation (changing the rules of the game) Globalization • Merriam Webster • dictionary Re-engineering • Michael Porter “Strategy is about being different. It means deliberately choosing a different set of activities to deliver a unique mix of value” Time-base Competition • Hamel and Prahalad New Business Model Country capabilities Where does competitive advantage come from? The use of valuable, rare, non-substitutable, and appropriable resources and capabilities to create monopoly or rents • Resource-based view Knowledge-based Competition Network Organizations Core Competencies

Key Debates in Strategy Strategy Formulation vs. Strategy Implementation Can you create sustainable competitive advantage? Which is most valuable-physical assets or intangibles Where is the most value created?

Conclusion: Elements of a Good Strategy A good strategy includes: • Customer Needs • Competitive Position • Resources and Capabilities Underlying Strategy • Internal/external Constraints • Levels of Uncertainty Understanding and Analysis of:

Strategy and Execution Strategy Strong Weak Doomed to Fail A Botched Job Weak Execution A Good Chance for Success Flirting with Disaster Strong

Leadership Tasks… Managing Resources Recognize the added value of each resource and applying the proper resource in the appropriate way at the appropriate time. Protecting Resources Develop Exclusive legal franchises; Patents; Channel Crowding; Causal ambiguity; Learning curve; Buyer switching costs; Reputation Recognize which resources will be valuable in the future and building those resources now. Preserving existing resources. Allocating Resources Source: David Besanko and Anne Gron “Notes on the Resource-based view of the Firm 2000. Kellogg School of Management

The Need for Leadership • "There is nothing which rots morale more quickly and more completely than . . . the feeling that those in authority do not know their own minds." Lionel Urwick

Framework for Organizational Diagnosis 1 Vision 2 Strategy 4Decision Support Systems 3 Structure 6Human Resource Systems 5Reward Systems 7Organization Culture PERFORMANCE Source: Robert Duncan, 1999

An Overview of Strategy: Past, Present, and Future