Strategic Management

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  • 1. Strategic Management Syllabus Strategic Management B01.2301.01 & 06 Fall 2007 Preliminary Syllabus Sonia Marciano Clinical Associate Professor of Management and Organizations Office: KMC 7-95 Contact: Phone: 998-0073 E-Mail: smarcian@stern.nyu.edu Office Hours: By Appointment. Teaching Fellows: Admin. Assistant: Required reading: • Strategy and the Business Landscape, Second Edition, by Pankaj Ghemawat, Prentice Hall, 2005. (Referred to as SBL below.) • Corporate Strategy: A Resource-Based Approach, Second Edition by D. J. Collis and C. A. Montgomery, Irwin McGraw-Hill, 2005. (Referred to as CS below.) • Strategic Management Coursepack • Articles handed out or available online from Blackboard Key Dates and Deadlines: • Homework due dates are indicated in detailed syllabus below • Thursday, October 18th, 2007 Take Home Mid-Term Exam Due • Tuesday, December 18th, 2007 Final Exam from 9-11am Course Overview and Objectives: The central questions of this course are: • What allows certain firms in certain industries to earn positive economic profits while others deliver negative returns? • Why can certain firms sustain their economic profits over long periods of time, while for other firms these profits quickly disappear? Three characteristics describe the approach to these questions. First, we will focus on the high level strategic decisions which firms face: entry into new industries, positioning, firm size and scope, capital investment, etc., while spending less time on managerial issues. Second, we will seek broad principles that can be applied across many firms and markets, rather than behavioral issues and/or institutional details that apply only in restrictive scenarios. Finally, we will derive these broad 1
  • 2. Strategic Management Syllabus principles from microeconomic theory. As such, potential answers will be subjected to the rigor of economic analysis to test their validity and applicability. This course trains business leaders to look outward to the environment and inward to the firm’s resources and capabilities and operating policies. As such, we describe a firm’s strategy as the formulation of “competitive strategy”, “corporate strategy” and “organizational strategy”. Competitive strategy involves identifying structurally attractive industries and developing the most attractive position within that industry, where attractiveness is driven by absolute conditions combined with the resources and capabilities the firm brings to that position. Businesses create value by operating in positions within industries that, by virtue of the characteristics of industry, the position and the firm, are defensible from the encroachment of competitors and deterioration of the environment as a whole. Corporate strategy focuses on the management and understanding of multi-product, multi-location and multi-business firms. Although we devote limited time to the topic, organizational strategy involves developing policies within each functional area of the business unit that are integrative and consistent with the firm’s plan for creating value. The following structure is intended to help you organize what you learn into an overall framework for evaluating business strategy. However, it is important to recognize upfront that this class can not be as perfectly organized as the outline suggests. This is not accounting or statistics which begin with core, universally accepted principles, and then build to harder problems and applications. Instead, business strategy is complicated throughout, and we will be applying new tools and concepts to answer questions that arise throughout the class. 1. Tools for the Analysis of Business Strategy: • Five Forces Analysis -- Analysis of the forces affecting competition in a market. • Positioning Analysis – Firm level choice to exploit/neutralize industry forces • Added Value – Source of firm’s leverage in the vertical chain to which it belongs • Resource Based View of the Firm – Determination resources significant in generating firm profits and the extent to which resources are adapted to the firm’s external environment. • Consonance Analysis – Assessment of the value creation and capture prospects of a firm. • Value Added Analysis – Quantification of contribution of component activities of the firm to its overall profitability. • Game Theory – Analysis of the responses of competitors to a firm’s strategies and the implications of these responses for strategic decisions. 2. Key Questions in the Analysis of Business Strategy: • What are the primary sources of a firm’s competitive advantage? • What position does or should the firm “occupy”? • What are firm resources? How can resources be developed and acquired? 3. Key Questions at the Corporate Strategy Level: • What determines the boundaries of firms? At what “levels” does the firm’s strategy apply? That is, what set of activities should a firm be engaged in and at what scale? • Why do multi-product, multi-location and multi-business firms exist? How do they create value? • How should these activities be organized to optimize the performance of the firm? How are multi-product, multi-location and multi-business firms managed? 2
  • 3. Strategic Management Syllabus 4. Dynamic Issues: • How can advantage be sustained through time? • What advantages arise from being the first-mover in a market? Are these advantages especially large in high-technology industries? • What prevents other firms from imitating the strategies of successful first movers? • How should firms weigh the risks and benefits from investments in new resources and capabilities, particularly when market conditions are highly uncertain? Course Administration This is an intensive course with extensive reading and analytical assignments. The only way to be prepared for each session is to start preparing early. A useful guideline to keep in mind is a 3-hour class will demand 4 - 6 hours of preparation time. This course is less about acquiring a “bag of tricks” and more about developing analytical skills and executive intuition and demeanor. If you are diligent about preparing for class, you will sharpen your ability to think, read, write, speak, and present your arguments logically. This is not a lecture course and you are responsible for a large portion of your own and your peers’ development. You are required not only to attend classes but also to carefully prepare for each class, contribute actively as well as listen carefully to others. The emphasis on case analysis makes it crucial that preparation for class is of consistently high quality. Please consider the following guidelines for high quality class participation: • Relevance: Are your comments clearly related to the case and to the comments of others? • Advancement: Does your comment move the class discussion forward? Does it take the discussion farther or deeper than the previous comments? • Fact-Based: Have you used specific data from the case, from readings, or from personal experience to support the assertions that you are making? • Logical: Is your reasoning consistent and logical? Do you use economic concepts correctly? Classroom Policies We will use the Stern Default Policies for MBA Classes: Laptops, Smartphones, & Other Electronic Devices: May not be used in class. Attendance: Required and part of grade. Faculty will excuse absences only in the case of documented serious illness, family emergency, religious observance, or civic obligation. If you will miss class for religious observance or civic obligation, you must inform your instructor no later than the first week of class. Recruiting activities are not acceptable reasons for absence from class. Absence from the first day of an intensive course will result in removal from the course. Arriving Late, Leaving Early, Coming & Going: Students are expected to arrive to class on time and stay to the end of the class period. 3
  • 4. Strategic Management Syllabus Course Grading Course grades will be determined as follows: • Homeworks 35% • Quiz 25% • Final Exam 40% Homeworks. We will use a number of homework assignments to give you an opportunity to apply the concepts and frameworks covered in class. Some of the homeworks are done individually while others are done in groups. You must make a substantial contribution to an assignment if it bears your name – group work means the group worked on the assignment together. The three homework assignments are indicated in the syllabus. Please turn in a hard copy of homeworks in class. Late assignments will not be accepted. Concept Quiz. There will a quiz in class week 4 to test and provide feedback on your mastery of the core concepts of the course -- closed-book, closed-note. Final Exam. The course concludes with a cumulative closed book/closed notes in-class exam given during exam time final exam. The final exam will take 2 hours and the format of the final will contain True/False, short answer, computations and a mini-case. I will post a sample exam mid- way through the course. Guidelines for Discussion/Case Preparation: Although you are given specific case questions, you should process all cases approximately as the framework below suggests. When you are asked to turn in one or more of the case questions, your write up should reflect insights drawn from the thorough process described here. 1. High Level Understanding of Key Issues: What are the most pressing key issues the firm is facing? Be sure to revisit this question after you have completed an indepth analysis 2. Analysis of External Environment: o Porter’s 5 Forces plus Complements, and o Macroenvironmental analysis 3. Analysis of Firm Level Assets, Capabilities, and Resources: o Assessment of firm’s strengths and weaknesses o Are any of the firm’s resources or other sources of competitive advantage? Are those advantages sustainable? What are the firm’s core capabilities? o What do the firm’s financial statements say about its health? Trends? Comparison to competitors? 4. Analysis of business-level positioning strategy used by the firm: o What is the overall positioning of the firm is in its market? o How is the positioning strategy supported (or not) by its functional strategies? o Evaluate the positioning strategy in the context of the competitive and/or cooperative dynamics of the industry. Be sure to include any appropriate quantitative analysis of the advantage this position yields (or fails to yield) over the firm’s competitors. 5. Analysis of the corporate-level strategy of the firm: o Identify the businesses the company is in (or is considering entering), how they are related (or unrelated), and whether and how they create additional value in their 4
  • 5. Strategic Management Syllabus combination. Be specific and detailed. If it is unclear that value is created, try to assess why the firm might have chosen to enter those businesses. o Identify and analyze the methods of entry the firm has used to enter those businesses. Were the methods of entry used (or proposed) the best choice given the firm’s objectives, environment, strengths, weaknesses, and strategy? Be sure to include any appropriate financial analysis to support your assessment. 6. Recommendations Recommendations should respond to the key issues of the case, and must be specific and actionable. They must not be obvious “so what” platitudes, and they must be consistent with the analysis. You should evaluate the impact of each recommendation on the firm’s environment, strengths, weaknesses, and strategy. Do not forget to consider the firm’s financial standing when making recommendations. 5
  • 6. Strategic Management Syllabus SCHEDULE Class Topics and Reading Assignments Introduction, External & Analysis, Competitive Advantage 1 Introduction to Strategic Management (September 10th) 9/10 Readings: Entire Syllabus…truly fascinating reading SBL Chapters 1 & 2 “What Is Strategy?” By: Porter, Michael E. Harvard Business Review, Nov/Dec96, Vol. 74 Issue 6, p. 61-78 (Posted on Blackboard) Prepare: Apple 2006 (In coursepack) 1) Taking the late 1980’s and early 1990’s as the time frame and consider the "non-Apple" part of the computer industry, "Wintel," as a market segment. How would you characterize rivalry among firms in this segment? Since Apple was not a “Wintel” company and had a proprietary technology, did this rivalry matter for Apple? 2) In the 1990’s, at the same time Apple’s financial performance was strong, prescient insiders commented that Apple was “on a glide path to history”. What economic forces were working to undermine Apple's competitive position in the computer industry? 3) What strategic mistakes did Apple make in the 1980s? 4) What was (and arguably is) Apple’s “competitive advantage”? 5) Has Jobs finally solved Apple’s long-standing problems? Evaluate the iPod: - How significant is the market for and sustainable is Apple’s advantage in the iPod? - Does the iPod give Apple a gateway to other markets (even computers)? 2 Industry Analysis (September 17th) 9/17 Readings: SBL Chapter 3 Prepare: Crown Cork and Seal (In coursepack) 1) Performing a Five Forces analysis on the tin‐plated can industry 2) The intensity of rivalry suggests that can makers are willing to cut prices. Why do customers backward integrate anyway? 3) Explain how Connelly was able to increase the margins Crown earned on its output during his tenure. Address the following: - Product Line - Cost Reduction Activities - Plant Locations - Investment and R&D - Various Aspects of Customer Service 4) Does Crown have an overall cost advantage or disadvantage relative to other can makers? Stated simply, Crown gave customer service. Given how competitive this industry was, it is likely that Crown's competitors also attempted to give good service. What is the meaning of customer service in this industry? Why is Crown able to succeed where other fail? How is Crown rewarded for giving customer service? (that is, where on the financials does the reward for customer service show up?) Is Crown's strategy imitable? 6
  • 7. Strategic Management Syllabus 3 Internal Analysis and Competitive Advantage (September 24th) 9/24 Readings: Ratio Analysis Handout (Posted on Blackboard) Prepare: Wal-Mart Stores in 2003 (In coursepack) 1) What are the challenges of competing in the discount retail industry? Apply Porter’s 5 Forces and a macroenvironmental analysis. 2) What are Wal-Mart’s key resources and capabilities? 3) Use the ratio analysis handout to analyze Wal-Mart. What inferences can you make? 4) What competitive advantages does Wal-Mart have? Quantify the sources of Wal-Mart’s competitive advantage in retailing. 5) How could other retailers compete with Wal-Mart? 6) What criteria should Wal-Mart use to evaluate its options for growth? Which one(s) would you choose and why? Homework 1: Ratio Analysis. Pick a company from the Fortune 500 that is NOT your team case (http://money.cnn.com/magazines/fortune/fortune500/) and get its most recent 10-K from www.sec.gov. In one page maximum, calculate its profit ratios, liquidity ratios, activity ratios, and leverage ratios using the handout on Blackboard, and provide a brief (e.g. one-sentence) interpretation for each ratio. **Please complete individually** Business-Level Strategy and Competitive Dynamics 4 Competitive Positioning: Cost Advantage (October 1st) 10/1 Prepare: Airborne Express (In coursepack) 1) How and why has the express mail industry structure evolved in recent years? How have the changes affected small competitors? 2) How has Airborne survived, and often prospered, in its industry? 3) Attempt to quantify Airborne’s sources of cost advantage. 4) What inferences can you draw from your analysis for Airborne’s future? What recommendations would you have for Airborne? *Concept Quiz: Covering industry analysis, internal analysis and competitive advantage Homework 2: Write up your response to questions 2 and 3 ***Please complete in groups** Also, write up your response to question 4 **Please complete individually** 5 Competitive Positioning: Differentiation (October 8th) 10/8 Prepare: Ice Fili (In coursepack) 1) How attractive is the Russian ice cream market? How do you think it will evolve? 2) What are some potential sources of advantage in this market? 3) How well positioned is Ice-Fili? 7
  • 8. Strategic Management Syllabus 6 Competitive Dynamics (October 15th) 10/15 Readings: SBL Chapters 4 & 5 The Right Game: Use Game Theory to Shape Strategy. By: Brandenburger, Adam M.; Nalebuff, Barry J. Harvard Business Review, Jul/Aug95, Vol. 73 Issue 4, p57, 15p (Posted on Blackboard) Prepare: Dogfight over Europe: Ryanair (In coursepack) 1) What are key elements of the competitive strategies of Ryanair and its competitors? How does each attempt to create superior value? 2) Estimate Ryanair’s cost structure using the exhibits from the case, being careful to state your assumptions. Can Ryanair make a profit charging I₤98 for a London-Dublin fare? 3) If Ryanair offers tickets for I₤98, what impact will this have on capacity utilization and subsequent costs and profits at British Airways and Aer Lingus? 4) Will British Airways and Aer Lingus retaliate by lowering their own prices? (Provide both the quantitative and qualitative reasons for your opinion.) 8
  • 9. Strategic Management Syllabus Corporate-Level Strategy 7 Expanding the Scope of the Firm Through Innovation (October 22nd) 10/22 Prepare: Primer on the US Television Industry (Posted on Blackboard) 1) From the point of view of a network describe the structure of the U.S. network television industry. Who are the buyers? What product are they buying? Who are the key suppliers? What inputs do they provide? Who are the competitors – as defined by a framework like the five forces? 2) Contrast this with the structure of the pay-cable TV business, as represented by HBO (if you are not familiar with HBO, I highly suggest some R&R—you are working way too hard). Who are HBO’s buyers, suppliers, and direct competitors? 3) How does the industry structure faced by a cable company that doesn’t charge for subscriptions – like TNT or ESPN – compare to these two models? How about the industry structure for a pay-per-view provider? 4) Using your definitions of the key competitors, buyers, and suppliers from question 1, perform a Five Forces Analysis of the U.S. Network TV industry. For each force, be sure to discuss each distinct threat separately. That is, if you think there is more than 1 group of suppliers, say, then discuss the power of each group separately. How have these forces been changing over the lat 20 years or so? 5) Compare and contrast the value creation proposition for a given TV network vs. a given cable channel. In particular, who are the key beneficiaries of the service, how large are the benefits, how do they pay for the benefits, what are the key costs, and how large are those costs? Most importantly, what is the “value added” of the network or the cable channel in this value creation process? 6) What are the important trends impacting the consonance of network TV? Consider changes in consumer priorities, changes in production technology, and any other changes you consider relevant. 7) Two key trends impacting network and cable TV are the emergence of Personal Video Recorders – like TIVO – and the proliferation of channel options through satellite broadcasting, pay-per view movies, (eventually) internet broadcasting, etc. Compare and contrast how each of these trends impacts the long term consonance of network TV vs. cable TV. 8) Finally, something to think about before we discuss firm resources (the resource based view of the firm). Some industry analysts suggest that NBC was successful in the 1990s largely due the “financial discipline imposed by its parent, General Electric.” Do you agree with this? Or do you see other key resources possessed by NBC which gave it a source of competitive advantage over the other networks? How powerful do you think those resources were? 9
  • 10. Strategic Management Syllabus 8 Expanding the Scope of the Firm Through Vertical Integration (October 29th) 10/29 Readings: CS Chapter 3 “Note on Corporate Strategy” by Mikolaj Jan Piskorski (HBS #9-705-449) (In coursepack) Prepare: Pepsi Bottler Case (Website) 1) Would you consider concentrate sales to be Pepsi's "core" activity? Who does Pepsi compete against, and how tough is the competition? Who are Pepsi's buyers and suppliers and what is the nature of their relationship? Why does Pepsi earn such a high return in concentrate sales? 2) Pepsi earns a high return in concentrate sales, so why should it invest in a low return business like bottling? What might the synergy be? Likewise, what are the possible synergies between selling soft drinks and selling snack foods or operating restaurants? Consider both the possible costs and benefits of integration in these cases. 3) Focus on the vertical relationship between Pepsi and its bottlers specifically. There are two critical aspects of the historical agreements between Pepsi and its bottlers: Pepsi had given the rights to bottle its beverage in perpetuity and exclusively within a particular territory. How do these stipulations help align the incentives of Pepsi and the bottlers? Are there still potential benefits of integrating? Homework 3: Write up your response to questions 2 and 3 above and turn in at beginning of class (page limit: 2 single spaced type written pages) **Please complete in groups** 9 Diversification Strategies/Organizational Issues (November 5th) 11/5 Readings: CS Chapters 1 & 2 Prepare: The Walt Disney Company: The Entertainment King (In coursepack) 1) What measures or indicators would you use to determine whether Disney has a successful corporate-level strategy? Does Disney have a successful corporate-level strategy? 2) What accounts for Disney’s performance? How does it develop and deploy valuable resources? 3) How was Michael Eisner able to increase net income in his first four years as CEO? What did he do to rejuvenate Disney? 4) What challenges does Disney face at the end of 2000? Now? 10
  • 11. Strategic Management Syllabus 10 Diversification Strategies, Cont’d (November 12th) 11/12 Readings: CS Chapter 4 and 5 Note on Market Failures (posted on Blackboard) Prepare: Pepsi and FritoLay (Posted on Blackboard) Pepsi and Restaurants (Posted on Blackboard) 1) Why was Pepsi’s acquisition of FritoLay so successful? 2) Are there synergies between FritoLay and the soft drink division? What are they? 3) Do Pepsi and FritoLay capitalize on potential synergies? How? 4) Why do you think Pepsi got into restaurants? 5) What were the issues with respect to Pepsi also operating in the sale of concentrate? Were there specific issues around “competing with the customer”? Was entering restaurants a way to end the battle for fountain sales? 6) Why do you think Pepsi ultimately divested itself of restaurants? 11 Organizational Limits to Firm Scope (November 26th) 11/26 Readings: CS Chapter 6 and 7 “Are you paying too much for that acquisition?” by Robert G. Eccles, Kersten L. Lanes, & Thomas C. Wilson. Harvard Business Review, July-August, 1999 (Posted on Blackboard) Prepare: Noodle and Company (In coursepack) 1) Evaluate the Noodles & Company business idea. 2) Evaluate Noodles’ performance so far. 3) What should Kennedy consider in evaluating Noodles’ growth options? 4) Should Noodles pursue a franchising growth strategy? Why or why not? What other alternatives are available? 5) What competitive benefits would a Noodles franchisee get from its affiliation with the company? In the US? Overseas? How do these benefits arise? From which resources, strategic assets and capabilities? 6) What resources, strategic assets and capabilities would a franchisee contribute? How would Noodles benefit locally and globally from them? 11
  • 12. Strategic Management Syllabus 12 Strategy in a Global Context (December 3rd) 12/3 Readings: “Clusters and the New Economics of Competition” by Michael E. Porter (HBS # 98609) (In  coursepack)    Sharon Oster, Modern Competitive Analysis, Chapter 6 (Competing in Global Markets),  pages 101‐115 (In coursepack)  Prepare: Robert Mondavi (In coursepack) 1) Evaluate the structure of the global wine industry. How and why is the structure changing? What challenges does Mondavi face at the time of the case? 2) Evaluate the economics of owning an independent ultra premium winery of say, 100 acres in Napa. Come up with a rough return on capital figure. How advantaged is Mondavi relative to the independent vineyard you made the calculation for? 3) Why are large alcoholic beverage firms such as Diageo and Foster’s entering the premium wine segment? Evaluate their prospects? What impact to these entrants have on Mondavi and how advantaged is Mondavi relative to these new players? 4) What are Mondavi’s goals in setting up interenational joint ventures? 5) How and why does location matter? 6) What should Napa vineyards be doing to best position themselves for more global competition? Homework 4: Write up your response to questions 2 and 4 above and turn in at beginning of class (page limit: 2 single spaced type written pages) **Please complete in groups** Corporate Transformation & Wrap Up 13 Corporate Transformation & Conclusions (December 10th) 12/10 Reading: “Industry Transformation” by Michael E. Porter, Jan W. Rivkin (HBS #701008) (In coursepack) Prepare: De Beers in the Millennium (Posted on Blackboard) 1) The De Beers organization was successful at monopolizing the trade of gem quality rough stones for over a century. Please explain the mechanisms by which the firm managed to sustain its central position in the diamond trade for as long as it did. 2) Why has De Beers given up monopolizing rough stones? That is, De Beers had a strategy that served it well for decades. What caused this strategy to lose consonance (“fit” with the conditions in its environment)? 3) Evaluate De Beers’ branding strategy. Final Tuesday, December 18th, 9-11am. This syllabus is a guideline only; instructor reserves the right to change the syllabus as necessary. 12