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• Failure to Innovate: Using outdated products/high costs (e.g., General Motors).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