Strategic Management: Outside-in View

• Strategy 1 focuses on the "Outside-in View" and the "External Environment"
• The lecture was given by Dr. Ulrich Leicht-Deobald on January 28, 2025

Structure of lectures

• Jan 21: Introduction/The Science of Teams
• Jan 28: Strategy 1: Outside-in View (The «External Environment»)
• Feb 12: Strategy 2: Inside-out View
• Feb 25: Strategy 3: New Forms of Strategy
• Mar 18: International Business
• April 1: Organisational Design
• April 14: Final MCQ

Agenda

• Part 1: The History of Strategic Management
• Part 2: The Outside-in View of Management (The “External Environment”)

Learning Goals

• Understand the historical origins of Strategic Management
• Know the importance of a firm's strategy for achieving a competitive advantage and, thus, superior performance
• Be able to use diverse strategic management tools, such as Porter's 5 forces, and learn how to apply them
• Reflect upon the assumptions of those tools

Preparation

• Required reading: Porter (2000). How Competitive Forces Shape Strategy. Harvard Business Review
• Listen: Doughnut Economics, Rethinking Economics for the 21st Century (2018) on Azeem Azhar's Exponential View (Harvard Business Review)

Practice

• The power of positive practices can be intentionally explored
• Till the soil
• Neuroplasticity
• Train the brain for the good
• Positive deviance
• Foster excellence in the direction of the good

Strategic Management Definition

• Strategic management involves major intended and emergent initiatives by general managers
• It is on behalf of owners
• It involves utilization of resources to enhance firm performance in external environments
• (Nag, Hambrick, & Chen, 2007)

Evolution of Strategy

• The concept of "strategy" originates from ancient Greek terms: "stratos" (army) and "agos" (leader)
• Business Schools introduced the course “Business Policy”
• Foundation of Strategy and Management Consulting Firms
• Strategic Management became an academic discipline
• Foundation of Journals and professional Societies
• Strong growth in terms of researchers and interested practitioners

Core Question

• Why are some firms more profitable than others, even with competition and imitation?
• Achieving above-average performance is key

Fundamental Issues

• How do firms behave?
• Why are firms different?
• What are the functions of headquarters in multi-business firms?
• What determines success or failure in international competition?
• (Rumelt, R.P./Schendel, D.E./Teece, D.J. (Eds.): Fundamental Issues in Strategy. Cambridge, MA: Harvard Business School Press. 1994)

Performance Heterogeneity

• It is about finding the potential sources of performance heterogeneity

Strategy Content Vs. Process

• Strategy content involves the right direction and infeasible execution if done right
• Strategy process involves the wrong direction and feasible execution if done right

Strategy Definition

• Strategy can be defined as the determination of long-term goals and objectives of an enterprise
• It includes adopting courses of action and allocating resources to achieve these goals
• (Alfred D. Chandler (1962))
• Strategy is a plan, a "how," a means of getting from here to there.
• Strategy is position; that is, It reflects decisions to offer particular products or services in particular markets
• Strategy is perspective: vision and direction
• (Henry Mintzberg (1994))
• Guiding Frames are Missions and Values with visions and the strategic options to go about them
• (Müller-Stewens (2010))

Reasons for Strategy

• For orientation/providing direction
• Building a “shared understanding”
• Coordination of activities
• Anticipation of future developments
• Information and involvement of stakeholders
• Reflection and challenging the state of the art
• Basis for management power
• Ex-post rationalization of decisions

Strategy Assumptions

• Strategies are based on assumptions that may not always hold true
• Ken Olsen (1977; Founder and CEO of DEC) said: „There is no reason for any individual to have a computer in his home."
• Gottlieb Daimler (1901) said: "The worldwide demand for cars will never exceed one million, because of the lack of available chauffeurs!"

Global Megatrends

• Growth and aging of the world population
• Urbanization and metropolization
• Energy demand and climate impact
• Economic globalization and emerging markets

Sustained Competitive Advantage

• „The ability to learn faster than your competitors may be the only sustainable competitive advantage."
• (Arie P. de Geus, Former head of planning, Royal Dutch/Shell Group of companies)

Competitive Strategy

• “Competitive Strategy is about being different
• It means deliberately choosing a different set of activities to deliver a unique mix of values."
• (Michael E. Porter)
• Strategy, is creation of a unique, valuable position using specific, diverse activities
• It involves stating decisions that help employees know what NOT to do
• It draws a clear image of a difference with continuous improvement (The Toyota Way)

Quest For Competitive Advantage

• Involves a strategy content involving diversification and making decisions to support process that yield above average performance

Explicit Strategies

• Explicit strategies help articulate and align objectives

Strategy Implementation

• "Most executives cannot articulate the objective, scope, and advantage of their business in a simple statement
• If they can’t, neither can anyone else.“
• (Collis & Rukstad (2008))
• Brilliant strategies have to be executed brilliantly
• (Lou Gerstner, Former CEO IBM)

Two Dominant Perspectives

• Alignment of a company and its environment allows you to maintain a dynamic balance
• (Michael E. Porter, Harvard Business School)
• Market-based view vs. resource-based view

Red Queen Paradox

• It notes unsustainable competitive advantages
• “here, you see, it takes all the running you can do, to keep in the same place. If you want to get somewhere else, you must run at least twice as fast ..."
• (Cuevas et al. 2022)

From Planning to Strategy

• Financial -> Forecast-based -> Externally Orientated -> Strategic Management

Environment as the Sea

• Strategic frameworks are lenses to navigate the "sea"

Strategic Frameworks as Lenses

• Core competencies (Prahalad and Hamel 1990s)
• PESTEL (Augliar 1960s)
• SWOT (Humphrey 1950s)
• Value chain analysis (Porter 1980s)
• Mission | Vision | Values
• 5 forces (Porter 1970s)

PESTEL

• Political: Taxation, Import/export rules, Stability / instability
• Economic: Interest Rates, Inflation, Unemployment, Disposable income
• Socio-cultural: Demographics, Social mobility, Levels of education, Attitudes towards product/service
• Technological: Innovations, Speed of technology adoption, Rate of obsolescence
• Legal: Regulations, Employment Law
• Environmental: Climate, Pollution and its regulation, Extreme weather events

Industry Knowledge

• Knowledge needed for strategic action that highlight strengths and weaknesses
• Provides groundwork for strategic agenda
• Clarify areas where strategic changes may yield the greatest payoff,
• Highlight the places where industry trends hold importance with possible opportunities or threats
• Can use these short and long videos to learn more:
  • https://hbr.org/video/3590615226001/the-explainer-porters-five-forces (short video)
  • https://www.youtube.com/watch?v=mYF2_FBCvXw (long video)

Porter's Five Forces

• These determine the profitability of a firm
• Overall industry attractiveness
• The position of the firm within that industry
• Includes:
  • New entrants
  • Suppliers
  • Buyers
  • Substitutes
  • Competitors in an Industry

Existing Competitors - Rivalry

• Influences among competitors and their impact on industry profits
• High competition will positively affect profits

Factors Implying High Exit Barriers

• Factors that lead to high costs of exiting a business
  • Specialised assets, low liquidating value, high change costs
  • Strong strategic interactions: Image, access to capital etc.
  • High emotional barriers
  • Administrative and social restrictions

The Bargaining Power of Suppliers and its Impact

• Supplier is more concentrated than the industry
• Threat of forward integration will negatively affect profits
• Product differentiation will negatively affect profits
• Entail of switching costs for the buyer will negatively affect profits

The Bargaining Power of Buyers and its Impact

• Is concentrated and purchases in large volume will negatively affect industry profits
• Threat of backward integration will negatively affect profits
• Offer of an undifferentiated product will have a negative effect
• High price sensitivity will negatively affect profits

Influence in the Substitution Market

• Easy switching can be done to substitute products
• Products may be easily standardised
• There is low brand loyalty
• The product is relatively unimportant
• Buyers profit margins are small

Influencing New Entrants

• Is made by economies of scale
• Absolute cost advantages (e.g., access to raw materials)
• Made by capital investment requirements and product differentiation
• Made by switching costs and regulations
• Access to distribution channels

The New Era of Doughnut Economics

• Considers what needs to be addressed moving forward: https://www.kateraworth.com/doughnut/

Next Steps

• Attend tutorial this week:
  • Play Mayhem: a serious game of Porter's Five Forces
  • Read Porter
• Next Lecture 11/2 "Strategy 2: Inside-Out View":
  • Read Case study: Nike Inc. (2019)
  • Read Rhodes (2022) "Nike: the Race to Wokeness" in Woke Capitalism: How Corporate Morality is Sabotaging Democracy Bristol University Press.