Strategy Chapter 1: What is Strategy?

Chapter 1 - What is Strategy?

• Strategy's Importance: Directs organizations, creates competitive advantages (superior customer value), allocates resources efficiently, and mitigates risks proactively.

• Factors of Successful Firms: Clear strategy (creating unique positions, coordinated activities), innovation (continuous improvement, tech advancements), customer value creation (meeting/exceeding expectations), and execution excellence (efficient operations, organizational alignment).

Why Some Firms Fail

• Lack of Strategic Vision: Inability to adapt to change (e.g., Kodak and digital photography).

• Failure to Innovate: Using outdated products/high costs (e.g., General Motors).

• Poor Resource Management: Misallocation/under-investment in critical areas.

• External Factors: Market shifts, changes in competition or regulations.

Why Google Outperforms Competitors

• Focused Innovation: Investment in AI, search algorithms, and cloud computing.

• Ad Revenue Model: Dominance in digital advertising.

• Ecosystem Approach: Integration of services (Gmail, YouTube, Android).

• Data-Driven Decisions: Use of evidence-based strategies.

Why GM and Kodak Went Bankrupt

• GM: High fixed costs, pension liabilities, lack of adaptability to fuel-efficient cars, 2008 financial crisis bankruptcy.

• Kodak: Late transition to digital photography, despite pioneering it, over-reliance on film sales, poor strategic focus.

What is Strategy?

• Definition: Creating a unique and valuable position using coordinated organizational actions.

• Porter's View: Involves trade-offs and activities working together to create a competitive advantage.

• Characteristics: More than slogans, lead to actionable steps, concerned with positioning against competitors, includes trade-offs, and is a coordinated set of integrated activities.

Why Strategy is More Important (and Difficult)

• Globalization: Increased competition and broader market reach.

• Technological Advancements: Faster changes and innovation cycles.

• Knowledge Intensity: Shift from raw materials to intellectual capital.

• Hypercompetition: Constant pressure to innovate and differentiate.

Competitive Advantage and Value Creation

• Competitive Advantage: Achieved when a firm's profitability exceeds the industry average.

• Value Creation: Process of creating products/services customers value, resulting in increased sales, profitability, and share prices.

• ROIC Formula: ROIC = (Net Profit / Capital Invested)

• ROIC: Return on Invested Capital*

I/O Model of Strategy

• Focuses on external environment to gain above-average returns in an attractive industry

Resource-Based Model of Strategy

• Four attributes of resources and capabilities for sustainable competitive advantage: Valuable, Rare, Costly to Imitate, and Nonsubstitutable

• Core Competencies are the result of above attributes

Basic Model of Strategic Planning

• Defining mission and setting top-level goals
• Analyzing opportunities and threats (external)
• Analyzing strengths and weaknesses (internal)
• Selecting appropriate strategies
• Implementing chosen strategies

Strength of Planned Approach

• Providing clear direction
• Aligning resources

Weakness of Planned Approach

• Can be rigid
• Could fail in dynamic environments

Strategic Questions

• Where are we now? (SWOT analysis)

• Where do we want to go? (Vision/Mission, financial and strategic goals)

• How will we get there? (Business and corporate strategies)

• What comprises a company's vision? Core values (e.g., honesty, equality, creativity), independent of market conditions. Core purpose (statement of company existence and societal contribution).

Long-term objective/envisioned future (BHAG)

• Organizations' long-term target for 10-30 years from now.

Corporate Strategy

• Multi-business firms
• Horizontal diversification
• Vertical integration
• Geographical expansion/diversification

Business Strategy

• Strategy for single businesses
• Response to changing conditions

Broad Sources of Data

• Public Sector: Intergovernmental organizations (IGOs), monetary authorities, government departments.
• Private Sector: Databases, financial statements, industry codes (NAICS).
• Quality Business Media: e.g., Wall Street Journal, Financial Times, Reuters.

Explore the essential concepts of strategy, its importance in directing organizations, and how it creates competitive advantages. This quiz also examines why some firms fail due to a lack of strategic vision or poor resource management, contrasted with the success of companies like Google through focused innovation.