What is Strategy

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What is Strategy

  1. 1. Welcome to Business Policy & Admin MGS 5010 Dr. Joseph McGill Kean U - Willis 403E 908 737 4166 (O) [email_address] turbo.kean.edu/~jmcgill
  2. 2. <ul><li>Firm-level view </li></ul><ul><ul><li>Integrative - crosses internal functions/units </li></ul></ul><ul><ul><li>Fit – the firm in its environment </li></ul></ul><ul><ul><li>LT performance </li></ul></ul><ul><ul><li>LT (~irreversible) resource commitments </li></ul></ul>Business Strategy
  3. 3. Business Strategy antecedents <ul><li>Ancient Greece - military term Στρατηγικός: the army’s leader </li></ul><ul><li>von Clausewitz – strategy is emergent </li></ul><ul><li>Strategy appears in both business and military fields in mid-19th century America. </li></ul><ul><li>West Point graduates implemented what they learned: </li></ul><ul><ul><li>in the Civil War (developed the Staff Office) </li></ul></ul><ul><ul><li>in business in the 1850s </li></ul></ul>
  4. 4. <ul><ul><li>Why is it that some firms perform well over time relative to competitors, while other firms fail? </li></ul></ul><ul><ul><li>Who are the stakeholders relative to firm performance (e.g., managers, owners, investors, employees, customers, suppliers, …)? </li></ul></ul><ul><ul><li>What drives business performance ( value creation )? </li></ul></ul><ul><li>We will learn to apply strategic management “toolkits” to identify issues, evaluate alternatives, and choose & implement actions. </li></ul>Business Strategy questions
  5. 5. Business Strategy <ul><li>1959 – Ford foundation report on business schools > reform the curriculum! </li></ul><ul><li>Apply analytical models, e.g., game theory. </li></ul><ul><li>Move beyond neoclassical economics </li></ul>
  6. 7. The Facts <ul><li>Analysis of 8,000 US businesses 81-97: </li></ul><ul><li>19% sustained high performers. </li></ul><ul><li>20% chronic under-performers. </li></ul><ul><li>41% steady moderate performers. </li></ul><ul><li>10% declining performers. </li></ul><ul><li>10% improving performers. </li></ul><ul><ul><ul><li>McGahan,California management review, 1999 </li></ul></ul></ul><ul><li>NB Recent McKinsey research notes that sustainable success is now rarer than 20%. </li></ul>
  7. 8. Industry profitability 1987-1996 Source: Hawawini, Subramanian, & Verdin. Strategic Management Journal (2003)
  8. 9. Why are there performance differences among firms? <ul><li>Concentration of market power, monopoly positions ? (Bain) </li></ul><ul><li>Opportunistic innovation? (Schumpeter) </li></ul><ul><li>Efficiency through vertical integration? </li></ul><ul><li>Efficiency through control of transaction costs? (Williamson) </li></ul><ul><li>Capability to learn & adapt continuously </li></ul>
  9. 10. Drivers of performance (brief version) <ul><li>Desire - some firms seek dominance (e.g. Newscorp, WalMart, Canon, Dell, Sony) </li></ul><ul><ul><li>National competition - firms may be protected from the forces of competition (‘national champions’ for example) </li></ul></ul><ul><li>Ability </li></ul><ul><ul><li>To identify a valuable opportunity. </li></ul></ul><ul><ul><li>To innovate & protect the innovation (others see it and are attracted by first mover success). </li></ul></ul><ul><ul><li>To leverage firm-specific capabilities and resources. </li></ul></ul>
  10. 12. Alaska Gold Mine (You have 14 days)
  11. 13. Alaska Gold Mine (You have 14 days)
  12. 14. Alaska Gold Mine (You have 14 days)
  13. 15. Alaska Gold Mine (You have 14 days)
  14. 16. Alaska Gold Mine (You have 14 days) #3 (valley) 14 days 21 days Maybe $$$s None #4 (wait 3 days) 10-13 days to top 17-24 days to valley Yes, if top Lose, if storm None
  15. 17. The Alaska Gold Mine (You have 14 days) (wait 3 days) to top to valley Lose, if storm None #5 What if walk for 3 days? IF STORM  Keep walking, same as option #3 IF NO STORM  Turn back (total 6 days) + over top (7-10 days)  13 - 16 days
  16. 18. The Environment - “ Threats & Opportunities ” Management’s values & attitude toward risk Organization’s capabilities - “ Strengths & Weaknesses” STRATEGY GOAL Strategy Formulation
  17. 19. The Environment - “ Threats & Opportunities” Management’s values & attitude toward risk Organization’s capabilities - “ Strengths & Weaknesses” STRATEGY GOAL Strategic Management Process Performance Execution/ Implementation Control Feedback Communication Monitor & Measure Formulation Implementation
  18. 20. More specifically … Strategy consists of organization-wide commitments and actions required for a firm to exploit its competencies, gain competitive advantage , and earn above-average returns *commitments - long term (irreversible) commitments *actions - involving substantial creation, acquisition, or redeployment of resources *competitive advantage(s) – competitors are unable to copy/imitate
  19. 21. Terms Returns equal to those an investor expects to earn from other investments with a similar amount of risk Average (or “accounting”) returns Returns from firm-specific strategies that competitors are not simultaneously implementing Above-Average (or “economic”) returns
  20. 22. Limited sources of value creation <ul><li>Strategies </li></ul><ul><li>Structures/business models </li></ul><ul><li>Products/processes </li></ul><ul><li>Resource/capability creation </li></ul><ul><li>Resource/capability combination </li></ul><ul><li>New markets </li></ul><ul><li>But …good business ideas are hard to find! </li></ul>
  21. 23. Competitive Landscape Fundamental nature of competition is changing Hypercompetition Dynamics of strategic maneuvering among global and innovative combatants Price-quality positioning, new know-how, first mover Protect or invade established product or geographic markets
  22. 24. Competitive Landscape Fundamental nature of competition is changing Hypercompetitive environments Emergence of global economy Goods, services, people, skills, and ideas move freely across geographic borders. Spread of economic innovations around the world. Political and cultural adjustments are required.
  23. 25. Competitive Landscape Fundamental nature of competition is changing Hypercompetitive environments Emergence of global economy Rapid technological change Increasing rate of technological change and diffusion The information age Increasing knowledge intensity
  24. 26. Strategic flexibility? How can a firm develop dynamic capabilities in response to perpetually turbulent and uncertain competitive environments? Can firms change? (i.e., success breeds failure ) ?
  25. 27. Strategic Flexibility Strategic Flexibility Strategic Flexibility Strategic flexibility Strategic reorientation Capacity to learn Organizational slack
  26. 28. I/O Model of Above-Average Returns 1. Strategy dictated by the external environments of the firm (what opportunities exist in these environments?) 2. Firm develops internal skills required by external environment (what can the firm do about the opportunities?) 1. External Environments Industry Environment Competitor Environment General Environment Global Technological Economic Sociocultural Political/Legal Demographic
  27. 29. Four Assumptions of the I/O Model <ul><li>1.External environment creates pressures and constraints that determine the strategies that would result in above-average returns (deterministic) </li></ul><ul><li>2.Most firms competing within a particular segment are assumed to control similar strategically relevant resources and to pursue similar strategies in light of those resources </li></ul>
  28. 30. Four Assumptions of the I/O Model <ul><li>3.Resources used to implement strategies are highly mobile across firms </li></ul><ul><li>4.Organizational decision makers are assumed to be rational and committed to acting in the firm’s best interests, as shown by their profit-maximizing behaviors </li></ul>
  29. 31. Industrial Organization Model I/O Model of Above-Average Returns <ul><li>1. Study the external environment, especially the industry environment </li></ul><ul><ul><li>economies of scale </li></ul></ul><ul><ul><li>barriers to market entry </li></ul></ul><ul><ul><li>diversification </li></ul></ul><ul><ul><li>product differentiation </li></ul></ul><ul><ul><li>degree of concentration of firms in the industry </li></ul></ul>The External Environment
  30. 32. I/O Model of Above-Average Returns 2. Locate an attractive industry with a high potential for above-average returns Attractive industry: one whose structural characteristics suggest above-average returns Industrial Organization Model The External Environment An Attractive Industry
  31. 33. I/O Model of Above-Average Returns 3. Identify the strategy called for by the attractive industry to earn above-average returns Strategy formulation: selection of a strategy linked with above-average returns in a particular industry Industrial Organization Model The External Environment An Attractive Industry Strategy Formulation
  32. 34. I/O Model of Above-Average Returns 4. Develop or acquire assets and skills needed to implement the strategy Assets and skills: those assets and skills required to implement a chosen strategy Industrial Organization Model The External Environment An Attractive Industry Strategy Formulation Assets and Skills
  33. 35. I/O Model of Above-Average Returns 5. Use the firm’s strengths (its developed or acquired assets and skills) to implement the strategy Strategy implementation: select strategic actions linked with effective implementation of the chosen strategy Industrial Organization Model The External Environment An Attractive Industry Strategy Formulation Assets and Skills Strategy Implementation
  34. 36. I/O Model of Above-Average Returns Industrial Organization Model Superior returns: earning of above-average returns The External Environment An Attractive Industry Strategy Formulation Assets and Skills Strategy Implementation Superior Returns
  35. 37. Resource-based Model of Above Average Returns 1.Strategy dictated by unique resources and capabilities of the firm (what can the firm do best?) 2.Find an environment in which to exploit these assets (where are the best opportunities?) 1. Firm’s Resources The Firm
  36. 38. 1. Identify the firm’s resources-- strengths and weaknesses compared with competitors Resources: assets (tangible or intangible) used in delivering products or services Resource-based Process Resource-based Model Resources
  37. 39. 2. Determine the firm’s capabilities--what it can do better than its competitors Capability: how resources are managed and integrated in the delivery of a product or service Resource-based Process Resource-based Model Resources Capability
  38. 40. Four Attributes of Resources and Capabilities (Competitive Advantage) the firm is organized appropriately to obtain the full benefits of the resources in order to realize a competitive advantage Valuable allow the firm to exploit opportunities or neutralize threats in its external environment Rare possessed by few, if any, current and potential competitors Costly to imitate when other firms cannot obtain them or must obtain them at a much higher cost Nonsubstitutable Resources and Capabilities
  39. 41. Resources and capabilities that meet these four criteria become a source of: Core Competencies Valuable Rare Costly to imitate Nonsubstitutable Core Competencies Resources and Capabilities
  40. 42. Core Competencies are the basis for a firm’s Competitive advantage Strategic competitiveness Ability to earn above-average returns Core Competencies
  41. 43. 3. Determine the potential of the firm’s resources and capabilities in terms of a competitive advantage Competitive advantage: ability of a firm to outperform its rivals in the creation of value. Resource-based Process Resource-based Model Resources Capability Competitive Advantage
  42. 44. 4. Locate an attractive industry An attractive industry is one with opportunities that can be uniquely exploited by the firm’s resources and capabilities Resource-based Process Resource-based Model Resources Capability Competitive Advantage An Attractive Industry
  43. 45. 5. Select a strategy that best allows the firm to utilize resources and capabilities (that are superior to its rivals) relative to opportunities in the external environment Strategy formulation and implementation: strategic actions taken to earn above average returns Resource-based Process Resource-based Model Resources Capability Competitive Advantage An Attractive Industry Strategy Form/Impl
  44. 46. Resource-based Model of Above Average Returns Resource-based Model Superior returns: earning of above-average returns Resources Capability Competitive Advantage An Attractive Industry Strategy Form/Impl Superior Returns
  45. 47. Strategic Intent <ul><ul><li>The resources required to realize the strategy may not be available initially </li></ul></ul><ul><ul><li>Intent is about seeing the end state and deciding how to leverage internal resources, capabilities, and core competencies in a “staged” approach </li></ul></ul>
  46. 48. The Firm and Its Stakeholders Groups who are affected by a firm’s performance and who have claims on its wealth The firm must maintain performance at an adequate level in order to retain the participation of key stakeholders Stakeholders THE FIRM
  47. 49. Critical dependency: Stakeholders Capital Markets <ul><li>Shareholders (institutional ownership most active) </li></ul><ul><li>Major suppliers of capital </li></ul><ul><ul><li>Banks </li></ul></ul><ul><ul><li>Private lenders </li></ul></ul><ul><ul><li>Venture capitalists </li></ul></ul>Stakeholders Provide Resources
  48. 50. Capital Markets Product Markets Primary customers Suppliers Host communities & regulatory bodies Unions Stakeholders Provide Resources
  49. 51. Capital Markets Product Markets Organizational Employees Managers Nonmanagers Stakeholders Provide Resources
  50. 52. Stakeholder Involvement Two issues affect the extent of stakeholder involvement in the firm How do you divide the returns to keep stakeholders involved? E.g., Compensate employees? Increase dividends? Increase product value? 1 Capital Market Product Market Organizational
  51. 53. Stakeholder Involvement Two issues affect the extent of stakeholder involvement in the firm How do you increase the returns so everyone has more to share? 2 Capital Market Product Market Organizational
  52. 54. Some financial metrics P rofitability: important to Shareholders and Senior Managers Shareholders: ROE - return on equity Dividend Yield Senior Mgrs: ROA - return on assets Expense Ratios ROS - return on sales Profit Margin L iquidity: Impt to Lenders Current Ratio Debt/Equity Ratio Quick Ratio E fficiency: Internal Usage Accounts Receivable Turnover Inventory Turns
  53. 55. Cases <ul><li>Describe actual situations </li></ul><ul><ul><li>Forces you to choose among different options and plan implementation actions </li></ul></ul><ul><li>Cases include background events and supporting materials </li></ul><ul><ul><li>Financial statements </li></ul></ul><ul><ul><li>Operational data </li></ul></ul><ul><ul><li>Product lists </li></ul></ul><ul><ul><li>Transcripts of interviews with employees </li></ul></ul>
  54. 56. Case Skills <ul><li>Evaluate </li></ul><ul><ul><li>multiple aspects of a business situation </li></ul></ul><ul><ul><li>differentiate significant factors </li></ul></ul><ul><ul><li>deal with uncertainty, missing information </li></ul></ul><ul><li>Envision </li></ul><ul><ul><li>explanations not readily apparent </li></ul></ul><ul><ul><li>outcomes of decisions </li></ul></ul><ul><li>Integrate/Synthesize </li></ul><ul><ul><li>understand firm-level effects </li></ul></ul><ul><ul><li>interdependencies </li></ul></ul>
  55. 57. Case Analysis <ul><li>Put yourself “inside” the case </li></ul><ul><ul><li>Strategic decision maker </li></ul></ul><ul><ul><li>Board member </li></ul></ul><ul><ul><li>Outside consultant </li></ul></ul><ul><li>Purpose is to diagnose problems and find solutions. Unravel the case material. </li></ul><ul><ul><li>Background/Problem Statement 10-20% </li></ul></ul><ul><ul><li>Strategic Analysis/Options 60-75 % </li></ul></ul><ul><ul><li>Recommendations/Action Plan 10-20% </li></ul></ul>

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