Week 2 What is Strategic Management?

1. Week 2What is 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 strategy 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. 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

4. 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 performance is directly related to the quality of its strategy and its competency in implementing 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 that everybody else was ignoring”; Sam Walton Invests $500 million in inventory management technology

5. TWO RETAILERS AT A GLANCE Sears Wal-Mart Year founded 1891 1962 Stores 1980 Stores 2004 864 2026 +134% 600 5289 +781% Revenues 1980 Revenues 2004 $25.19 billion $36.1 billion 1.43X $1.64 billion $285.22 billion 174X Net profits 1980 Net profits 2004 606M (2.4% ROS) (507M) (-1.4% ROS) $55 M (3.3% ROS) $10.27 B (3.6% ROS) Market capitalization 1980 Market capitalization 2004 -------------------------------------- Sales per store 1980 Sales per store 2004 USD 4.8 billion USD 12.2 billion -------------------------------------- $29.2 million $17.8 million -39% USD 1 billion USD 200.2 billion -------------------------------------- $2.73 million $53.9 million Nearly 20X

6. A TALE OF TWO RETAILERS – PERFORMANCE MEASURES USD millions

7. THREE OVERARCHING THEMES   Executing strategy well is at least as important as creating a good one…yet too many leaders give little thought to implementation To succeed, the formulationof a good strategy and its implementa-tion must be inextricably connected We need to see a firm’s competitive position, not as a snapshot, but as a movie Firms and industries are dynamic in nature  Strategic leader-ship is essential if a firm is to both formulate and implement strategies that create value Strategic leadership is responsible for a) making substantive resource allocation decisions, and b) developing key-stakeholder support for the strategy

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

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

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. CORPORATE-LEVEL & 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 add value to it 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. STRATEGY FORMULATION AND IMPLEMENTATION ITERATE Wal-Mart example Compete as discount retailer in rural markets Leverage inventory and sourcing systems to be low-cost leader Strategy formulation: The process of deciding what to do WAL-MART EXAMPLE Implementation: The process of performing all the activities necessary to do what has been planned Invest heavily in organizational structure, systems, and processes

13. 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

14. Arenas • Where will we be active? (and with how much emphasis?) • Product categories • Channels • Market segments • Geographic areas • Core technologies • Value-creation stages Staging • What will be our speed and sequence of moves? • Speed of expansion • Sequence of initiatives Vehicles • How will we get there? • Organic 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

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

16. Objective To “bring humanity back to air travel” JET BLUE STRATEGY • Low fare commercial air carrier • Underserved but overpriced 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 other low fare competitors (e.g., leather seating, satellite TV) Differentiators • Grow from one route between two cities to multiple routes serving 20 cities in just 3 years Staging • Secure cost advantage by being willing and able to perform key tasks differently • One type of plane • JFK home base • Secondary locations 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 • Decisions about levers and resource allocation • 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 ON COMPETITIVE ADVANTAGE Internal External Dynamic • Resource-based view • Firms as heterogeneous bundles of resources and capabilities • Superior resources  Competitive advantage  Higher performance • Positional view • Industry attractiveness  competitive advantage and performance • Companies should: • - Position themselves in attractive industries, • or • - Increase attractiveness of current industries • Firm’s current market position isn’t accurate prediction of future performance • Look for trajectory—how firm arrived at current position • Look at future trends, internal and external

22. 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