MGMT 490 Strategic Management

1. MGMT 490Strategic Management Prof. Stephen Standifird Welcome!!!

2. Basic Content My contact info. Course objectives Text: Hitt et. al. (6th Edition) Grading Groups (50%) 2 subject pres./memos 1 final pres./memo Individual (50%) 2 exams (no final) Group Participation Syllabus Highlights

3. Course Philosophy • Application, application, application • Strategy - an active topic • Participation is a MUST! • News you can use • Informal but Serious • Informative and Enjoyable • Questions? Always Encouraged

4. How to Get an A Individual: • Read the Book • Attend the Class • Pay Attention!!! • Participate Group: • Plan Ahead (way ahead!!) • Data, Data, Data • Be Professional • Have Fun

5. What is Strategy?

6. In SBA to learn more about: A. Architectural Design? B. 18th Century European Art? C. Biochemical Engineering? Business!!!

7. What is Strategy? The study of how a company can make more money!!!

8. What is Strategy? • Strategic Competitiveness: • Achieved when a firm successfully formulates and implements a value-creating strategy. • Above-average Returns: • In excess of what investors expect to earn from other investments with a similar amount of risk. • Strategic Management Process: • The full set of commitments, decisions, and actions required for a firm to achieve strategic competitiveness and above-average returns.

9. What is Strategy? • The commitments, decisions, and actions that allow the firm to make more money! How is this done? • Two competing models 1. Industrial Organizational Model 2. Resource-Based Model

10. Model One:Industrial Organization (Porter’s Five Forces) The external environment should drive strategy. Locate and compete in an attractive (profitable) industry.

11. Model Two:Resource Based (Core Competency) The resources and capabilities of the firm should drive strategy. Build your strategy around existing resources.

12. Model Three:Life in the Real World!(the focus of this class) The external environment and the resources and capabilities of the firm drive strategy. Firms should seek to maximize profitability by locating and competing in an industry where the firm can most effectively leverage existing and potential resources.

13. Internal Environment Begin Here (the SW of SWOT) Strenghts Weakness Opportunities Threats External Environment Begin Here (the OT of SWOT)

14. Complicating Factors • Globalization • Tough to find a truly domestic product/market • Must be an international strategist • Technological Changes • Buy-it-here.com • Not just for high tech firms any more • Multiple Stakeholders • Capital Markets, Product Markets, Organizational • Government, Competitors, etc. (you get the point)

15. Model One:Industrial Organization (Porter’s Five Forces) The external environment should drive strategy. Locate and compete in an attractive (profitable) industry.

16. The External Environment The General Environment 1. The General Environment • Environmental Analysis • Segments of the Environment 2. The Industrial Environment • Industry Analysis (five forces) • Strategic Groups/Competitor Analysis

17. The External EnvironmentModel of Superior Returns 1. Study the external environment. 2. Locate an industry with high potential for above-average returns. 3. Identify strategy called for by the industry to earn above-average returns.

18. The External EnvironmentModel of Superior Returns 4. Develop or acquire assets and skills needed to implement the strategy. 5. Use the firm’s strengths (its assets or skills) to implement the strategy. 6. Maintain selected strategy in order to outperform industry rivals.

19. The External EnvironmentModel of Superior Returns 1. Study the external environment. 2. Locate an industry with high potential for above-average returns. 3. Identify strategy called for by the industry to earn above-average returns.

20. Demographic Segment Population, Age, Income, Ethnicity Economic Segment Inflation, Exchange rates, Savings rates, Interest Political/legal Segment Antitrust, (De)regulation, Taxation, Labor laws Sociocultural Segment Diversity, Social concerns, quality of life Technological Segment Product and process changes, Communications Global Segment Political events, global and regional crisis, Exchange rates The External Environment Part I: The General Environment

21. The General Environment:Important Issues to Remember • The same environmental trend will effect different industries differently (or not at all) • Internet: Auto Repair versus Book Store • The impact of a particular trend will effect different companies in an industry differently • Busier Schedules: Indigo Grill vs McDonald’s So. . . Scan for general trends and identify specific factors that influence your company

22. Demographic Segment Population, Age, Income, Ethnicity Economic Segment Inflation, Exchange rates, Savings rates, Interest Political/legal Segment Antitrust, (De)regulation, Taxation, Labor laws Sociocultural Segment Diversity, Social concerns, quality of life Technological Segment Product and process changes, Communications Global Segment Political events, global and regional crisis, Exchange rates The External Environment Part I: The General Environment

23. The External Environment Part I: The General Environment • Scanning • A general look around • Monitoring • Keeping track of what looks potentially important • Forecasting • Trying to predict where things will be going • Assessing • Trying to understand how the changes effect you

24. Scanning - Tech Sector The internet !!! Monitoring Rapidly changing Forecasting Will continue rapid change Assessing Short term? Not an issue Long term impact unclear Continue to monitor Scanning - Demo Sector Dual income families Monitoring Slow but steady change Forecasting Most couples working Assessing Short term? Eating out more, not buying groceries Must respond now “Quick Fix” meals The General Environment:Albertson’s Grocery Stores

25. Group Formation • You Pick’um, I referee • Five Persons Per Group (must be this way) • Once you have a group, let me know • If you need a person (or 2 or 3), let me know • Exchange information (e-mail, phone #, etc) • Identify potential companies • Give me back the group list and company name

26. Demographic Segment Population, Age, Income, Ethnicity Economic Segment Inflation, Exchange rates, Savings rates, Interest Political/legal Segment Antitrust, (De)regulation, Taxation, Labor laws Sociocultural Segment Diversity, Social concerns, quality of life Technological Segment Product and process changes, Communications Global Segment Political events, global and regional crisis, Exchange rates The External Environment Part I: The General Environment

27. The External Environment Part I: The General Environment • Scanning • A general look around • Monitoring • Keeping track of what looks potentially important • Forecasting • Trying to predict where things will be going • Assessing • Trying to understand how the changes effect you

28. Demographic Segment Population, Age, Income, Ethnicity Economic Segment Inflation, Exchange rates, Savings rates, Interest Political/legal Segment Antitrust, (De)regulation, Taxation, Labor laws Sociocultural Segment Diversity, Social concerns, quality of life Technological Segment Product and process changes, Communications Global Segment Political events, global and regional crisis, Exchange rates The External Environment Part I: The General Environment

29. The External Environment Part I: The General Environment • Scanning • A general look around • Monitoring • Keeping track of what looks potentially important • Forecasting • Trying to predict where things will be going • Assessing • Trying to understand how the changes effect you

30. Exercise: General Environment and Wal-Mart • Break in groups of 3 or 4 persons • Try to identify at least one general trend for each segment of the environment • Determine how this trend impacts Wal-Mart a.k.a. the worlds largest retailer (positive, negative or neutral) • How would you respond - time permitting

31. Demographic Segment Population, Age, Income, Ethnicity Economic Segment Inflation, Exchange rates, Savings rates, Interest Political/legal Segment Antitrust, (De)regulation, Taxation, Labor laws Sociocultural Segment Diversity, Social concerns, quality of life Technological Segment Product and process changes, Communications Global Segment Political events, global and regional crisis, Exchange rates The General Environment and Wal-Mart

32. The External EnvironmentModel of Superior Returns 1. Study the external environment. 2. Locate an industry with high potential for above-average returns. 3. Identify strategy called for by the industry to earn above-average returns.

33. External Environment: Part IIIndustry Analysis External Environment Model of Superior Returns • Locate an industry with high potential for above-average returns. An Industry is a group of firms producing products that are basically the same.

34. Porter’s Five Forces Model of Competition Threat of New Entrants Rivalry Among Competing Firms in Industry Bargaining Power of Suppliers Bargaining Power of Buyers Threat of Substitute Products

35. Threat of New Entrants Economies of Scale * Product Differentiation * Barriers to Entry Capital Requirements * Switching Costs * Access to Distribution Channels * Cost Disadvantages Independent of Scale * Government Policy *

36. Threat of Substitute Products Keys to evaluate substitute products: Products with improving price/performance tradeoffs relative to present industry products * Products with similar function limit the prices firms can charge For Example: Fax machines in place of overnight mail delivery E-mail in place of fax machines

37. Suppliers are likely to be powerful if: Supplier industry is dominated by a few firms * Suppliers exert power in the industry by: Suppliers’ products have few substitutes * * Threatening to raise Suppliers’ products have high switching costs * prices or to reduce quality Powerful suppliers can squeeze industry profitability if firms are unable to recover cost increases Supplier poses credible threat of forward integration * * Suppliers’ products are differentiated Bargaining Power of Suppliers

38. Buyer groups are likely to be powerful if: Buyers are concentrated or purchases are large relative to industry sales * Buyers compete with the supplying industry by: Buyer presents a credible threat of backward integration * Products are undifferentiated * * Bargaining down prices Buyers face few switching costs * * Forcing higher quality Buyers’ industry earns low profits * * Playing firms off of each other Buyer has full information * Bargaining Power of Buyers

39. Intensity of Rivalry Among Existing Competitors Cutthroatcompetition is more likely to occur when: Numerous or equally balanced competitors * Slow growth industry * High fixed costs * High storage costs * Lack of differentiation or switching costs * Diverse competitors * High strategic stakes * High exit barriers *

40. Porter’s Five Forces Model of Competition Threat of New Entrants Rivalry Among Competing Firms in Industry Bargaining Power of Suppliers Bargaining Power of Buyers Threat of Substitute Products

41. Threat New Entry Billions of $ to enter No new since mid 1970s VERY LOW Supplier Power Landowners, countries smaller than companies LOW Buyer Power You and I as individuals Very LOW Substitutes Methanol? Not driving? VERY LOW Rivalry Joint drilling operations Mergers and acquisitions “Regional focus” VERY LOW Profits??? Huge, enormous, monstrously large!!! Five Forces and the Oil Industry

42. Threat New Entry Small capital ($50,000) Can be run by a family VERY HIGH Supplier Power Real Estate controls all VERY HIGH Buyer Power Do you always go to the exact same restaurant? VERY HIGH Substitutes How often does the average family eat out? VERY HIGH Rivalry Why work together? Fierce competition VERY HIGH Profits??? Ouch! Not so good, Many don’t survive Five Forces and Restaurants

43. Pres./Memo One - Expectations • Provide a Brief company overview (none is fine) • Highlight results of the general environment analysis • Scanning, monitoring, forecasting, assessing • Conduct a detailed Five Force analysis • Provide a rough determination of the impact of each force force (support your position) • Summarize the overall model results • Explain where your company fits in the industry • Briefly mention the type of generic business-level strategy pursued by the company • The memo should replicate the presentation

44. THE Project Questions(Your conclusion should address these questions) What did we learn form the analysis that can be useful to someone within the company? Application, application and more application

45. Project Expectations • Keys to Success • Report the RESULTS of your analysis, not the process of analysis. However, • Be thoughtful (what’s really going on) • Make sure you SUPPORT YOUR ARGUMENT!!! Data, data and more data - support your position! (not a suggestion, a requirement)

46. The External EnvironmentModel of Superior Returns 1. Study the external environment. 2. Locate an industry with high potential for above-average returns. 3. Identify strategy called for by the industry to earn above-average returns.

47. Porter’s Five Forces Model of Competition Threat of New Entrants Rivalry Among Competing Firms in Industry Bargaining Power of Suppliers Bargaining Power of Buyers Threat of Substitute Products

48. The External EnvironmentModel of Superior Returns 1. Study the external environment. 2. Locate an industry with high potential for above-average returns. 3. Identify strategy called for by the industry to earn above-average returns.

49. Business-Level Strategy • A Strategy is an integrated and coordinated set of commitments and actions designed to gain a competitive advantage. • A Business-level strategy is a (strategy) targeted to specific, individual product markets.

50. Generic Business Level Strategies Source of Competitive Advantage Cost Uniqueness Cost Leadership Differen- tiation Broad Target Market Breadth of Competitive Scope Focused Differen- tiation Focused Low Cost Narrow Target Market