Unit 1 - Introduction to Strategy PDF

Unit 1 - Introduction to strategy 1.1 What is strategy–business strategy? An integrated or coordinated set of actions that companies implement to gain (and sustain) a competitive advantage by exploiting their resources and capabilities. In other words, business strategy explains how a company...

Unit 1 - Introduction to strategy 1.1 What is strategy–business strategy? An integrated or coordinated set of actions that companies implement to gain (and sustain) a competitive advantage by exploiting their resources and capabilities. In other words, business strategy explains how a company that competes with others, will perform better than others, which will lead to higher profits. The company’s general management faces important strategic decisions - Examples: Should the company internationalize? How, and by how much, should the company grow? Should the company launch a new product line? Should the company acquire a competitor? How can the company build a competitive advantage? 1.2 The prisoner’s dilemma Michael & Jason: accomplices in the same crime, got caught, imprisoned separately. Deal offered: expose the partner → receive a sentence of fewer years in prison in return. Two options: betray or not → Micheal’s decision will affect Jason’s future, & vice versa. The future of the two prisoners is played between four possible scenarios: No-one betrays: both receive only 2 years each. 1 prisoner betrays: 1 year in prison Other prisoner, who did not betray: 10 years. If both prisoners betray each other, they would each receive a prison sentence of 6 years. Each prisoner will want the best for himself, no matter what happens to his partner. For both is the best decision to betray the other, as it would result in a shorter sentence Conclusion: Michael & Jason betray each other: prison sentence, 6 years for each. No one betrays: both would receive the best combined sentence: only 2 years each. However, even if they had agreed to do so, it is likely that at least one of them would have deviated and would have opted to betray the other, since there is an incentive. The outcome is not optimal for neither of them “Nash Equilibrium”, where rational individuals, each pursuing their own self-interest, end up in a suboptimal situation. The prisoner’s dilemma also happens in real-life situations Examples: Public good provision Traffic congestion Voting in elections Climate change and pollution Doping in sports Fishing and Overfishing 1 ► In which type of market can we test this situation? This situation can be tested in oligopolies (few companies have exclusive control of the market). Companies may decide to cooperate in pricing strategies, collusion and cartels, strategic alliances, research and development,... Example: phone market (Orange, Movistar, Vodafone,…). Conclusion: These companies would be looking for their own benefit. ↓ Strategy (!) Why do companies need a strategy? Motivations: To make sense and purpose. To deploy resources in the most effective way. To coordinate decisions made by different people. To achieve and sustain a competitive advantage. To survive, to grow and to maximize profits. 1.3 Basic strategic concepts: Some strategic concepts… Mission (why) Organization’s purpose or reason for being. LinkedIn: connect the world’s professionals to make them more productive and successful Tesla: accelerate the world’s transition to sustainable energy Vision (what) What the company aspires to be or hopes to achieve in the long-term. LinkedIn: create economic opportunity for every member of the global workforce Tesla: create the most compelling car company by driving the world’s transition to electric vehicles Values (how) Organization’s core principles and philosophical ideals. Being transparent, trust, fun, passion, … Values of Coca-Cola company: Leadership, Collaboration, Integrity 2 Competitive advantage An attribute that allows a company to consistently achieve higher returns than the industry average. For example: cost structure, brand image, quality of products, distribution network, … ➤ makes the company’s products more desirable to customers than the p. of the competitors Ultimate goal: sustain the competitive advantage Comparative advantages vs. differential advantages: Comparative advantages: when companies produce something more efficiently than a competitor, which leads to higher profit margins. Differential advantages: when a company’s products are seen as both unique and of higher quality, relative to those of a competitor. Industry A group of companies that produce a particular kind of goods or services. Market A place where two or more parties can meet to engage in an economic transaction. Defined by substitutability. There are two dimensions: o Substitutability on the demand side o Substitutability on the supply side Value Chain Business model that describes the set of activities that a company carries out to create a product or service. Different steps that involve bringing a product from conception to distribution Purpose: increase production efficiency Companies can deliver maximum value for the least possible cost Boundaries: What the company does in the horizontal, vertical or corporate direction. Horizontal Boundaries Vertical Boundaries Corporate Boundaries Refer to the part of the Refer to the stages of Refer to the set of different businesses product market that the value chain that in which the company competes. the company serves, or are carried out in A company can operate in one business essentially, its size. the company. only or in multiple different The optimal limit of Manufacturing + businesses. expansion in the distribution of the Key strategy: diversification, which can horizontal depends on: good. Example: Apple be related or unrelated. with “Apple Stores” Possibility of exploiting Related diversification occur when economies of scale But: How to know if a company operates in several it is better to buy or Possibility of exploiting markets that are similar. Exa.: produce? Let's see it economies of scope Sony. in the following Possibility of exploiting exercise: Unrelated diversification occur learning economies when a company operates in several markets that are not similar. Exa.:, Ferrari. 3 Economies of scale Occur when an increase in production leads to a decrease in the average cost per unit. Two possible origins: Internal or External: Internal economies of scale occur when something within the company causes the average cost of production to be lower. → For example: Purchases; Specialization External economies of scale occur when something outside the company, but within the industry, makes the average cost of production lower. → For example: Suppliers Diseconomies of scale Occur when the average cost per unit increases due to the excessive size of production. Result from technical issues in a production process, organizational management issues,... Some reasons may be: Demotivation problems Communication issues SLIDES: AVERAGE COST, MARGINAL COST, MES Economies of scope or range Occur when average costs are reduced by introducing another product into our production portfolio. Average costs of producing two goods decrease when they are produced together rather than in different companies. There are economies of scope when the total cost of producing two goods together is lower than producing them separately in different companies: TC (q1, q2) < TC (q1, 0) + TC (0, q2) Learning economies Refers to the benefits (lower costs, higher quality, more effective pricing and marketing) that come from accumulating experience and knowledge. For example: Information sharing, work rules, new ideas, reducing client rotation,... Learning economies continue to improve efficiency over time, without reaching a set limit. Many ways this learning helps reduce costs: efficiencies/inefficiencies in production, better management, tastes of customers,... 4 1.4. Evolution of strategic management 1950s–1960s Senior executives experienced difficulty in coordinating decisions and maintaining control in companies that were growing in size and complexity. Companies lacked techniques and resources to develop in the long term. So, financial budgeting was developed to serve this purpose. 1970s–1980s Corporate planning is questioned. New era of macroeconomic instability because: Oil shocks of 1974 and 1979 International competition from Japanese, European, and Asian companies A turbulent business environment. Companies could no longer plan their investments. Result: A shift in emphasis from planning to strategy making. Focus on positioning the company in relation to competitors to max. the potential for profit. Transition from corporate planning to strategic management associated with increasing focus on competition and competitive advantage. 1990s Strategy analysis shifted from focusing on the sources of profits in the external environment to focusing on the sources of profit within the company. The focus on internal resources and capabilities has encouraged firms to identify what sets them apart from competitors and to design strategies that leverage these differences. Michael Porter’s: “Competitive strategy is about being different. It means deliberately choosing a different set of activities to deliver a unique mix of value.” 21 century Principles of strategy shaped by the challenging circumstances of a new era. Technology has been a particularly powerful force. Strategy focus on developing the responsiveness and flexibility to create successive temporary advantages. The recession of 2008 has encouraged new thinking about the purpose of business, fostering a new way of understanding the purpose of the business. Interest in corporate social responsibility, ethics, sustainability, and social legitimacy in long term corporate success. Will the COVID-19 pandemic bring new changes to organizations? thoughts! 5 1.5. Strategic management today Main characteristics: Strategy: means by which individuals or organizations achieve their objectives. There are a number of definitions of the term strategy: “...the determination of the long run goals and objectives of an enterprise, and the adoption of courses of action and the allocation of resources necessary for carrying out these goals...”, Alfred Chandler “...to define what business the company is in or is to be and the kind of company it is or is to be.”, Keneth Andrews “Strategy is about success”, Robert E. Grant What makes a strategy successful? Elements of a successful strategy Key words: plan, enterprise, goals, environment. Can you create your own definition? Participate! These same elements of successful strategies–clear goals, understanding the competitive environment, resource appraisal and effective implementation– form the key components of our analysis of business strategy. Strategy as a link between the firm and its environment The basic framework The firm embodies: goals and values resources and capabilities structure and systems The industry environment is defined by the firm’s relationships with customers, competitors and suppliers. Link between the firm and its external environment is the notion of strategic fit. For a strategy to be successful, it must be consistent with: the firm’s external and internal environment goals and values resources and capabilities structure and systems 6 The SWOT model Conception of strategy as a link between the company and its environment is similar to the SWOT model: However, a two-category classification of internal and external factors is more useful than the four- category classification of the SWOT model. Careful identification of these external and internal factors followed by an evaluation of their implications. Depth analysis of these factors, rather than a superficial categorization. Is global warming a threat or an opportunity? Share your thoughts! To be successful we have to ask ourselves (Peter Drucker): What are my strengths and weaknesses How do I act? What are my values? The answers to these questions can guide us in the key decisions we make to direct our lives: What do I want to be? What can I contribute? What kind of relationships do I need? Task of business strategy: determine how the company will use its resources in its environment and thus meet its long-term objectives, and how it will organize itself to implement that strategy. 7 But why do firms need a strategy? The strategy helps the effective management of organizations by: improving the quality of decision-making process facilitating coordination focusing organizations towards the achievement of long-term goals Strategy as... 1. Strategy as Decision Support: pattern that gives coherence to the decisions of an individual or organization. Strategy improves decision making in several ways: Simplifies decision making to find the most acceptable solution. Allows the coordination and integration of the knowledge of the different individuals in the company. Facilitates the use of multiple analytic tools and techniques. 2. Strategy as a Coordinating Device: help the CEO to communicate the identity, goals and positioning of the company to all members of the organization to ensure that it moves forward in a consistent direction. 3. Strategy as Target: Strategy is forward-looking: Concerned with what the firm will become in the future. Set aspirations that can motivate members of the organization. Conclusion: Companies need business strategies to give direction and purpose, to use its resources in the most effective way and to coordinate the decisions made by different individuals. Difference between strategy and tactic? Strategy is the overall plan for deploying resources to establish a favorable position. Tactic is a plan for a specific action. Strategic decisions share three common characteristics: They are important. They involve a significant commitment of resources. They are not easily reversible. Strategy is located in three places: CEOs and the other senior managers. In their speeches and written documents. In the decisions through which strategy is implemented. In small companies, strategy often remains in the minds of the entrepreneurs. In large companies, strategy is stated in strategic planning documents. In most companies it is very important to communicate their strategy to employees, customers, investors and partners. 8 1.6. Levels of strategy Strategic decisions can be summarized in two basic questions: (Two Levels) Where to compete? → Corporate strategy How to compete? → Business strategy Corporate strategy: scope of the firm in terms of the industries and markets in which it competes. Responsibility of top management team + corporate strategy staff. For example: diversification, vertical integration, acquisitions and new ventures. Business strategy: how the firm competes within a particular industry or market. Responsibility of the divisional management. 1.7. The strategic process How is the company’s strategy formulated? Can be formulated in two ways: Rational, planned process → Deliberate strategy Responding and adapting to events → Emergent strategy Mintzberg criticize deliberate strategies: «The notion that strategy is something that should happen way up there, far removed from the details of running an organization on a daily basis, is one of the great fallacies of conventional strategic management». Advantages of emergent strategies: promote adaptation and continuous learning within the organization. In practice, strategy-making often blends rational planning (deliberate strategy) with flexibility and adaptation (emergent strategy). Strategic analysis is key: not to answer problems but to help understand them. Summary Unit 1 Strategy is a key element for the success of organizations: a solid strategy doesn’t guarantee success, but it can improve the probabilities of success. Successful strategies tend to incorporate four elements: clear and long-term objectives deep understanding of the environment intelligent evaluation of internal resources and capabilities effective implementation. Strategy is not about detailed planning. It is related to the identification, management, and effective use of the sources of competitive advantage. To describe a company’s strategy, it is necessary to recognize: Where the company competes How the company competes The direction in which the company is moving A company’s strategy requires a combination of planning (rational design) and flexibility to respond to changing circumstances (emergent strategy). 9