Introduction To Strategic Management PDF

Sept. 17 INTRODUCTION TO STRATEGIC MANAGEMENT Module Structure Strategic Analysis o Intro o External analysis o Internal analysis Strategy formulation o Business strategy o Corporate strategy Strategy imp...

Sept. 17 INTRODUCTION TO STRATEGIC MANAGEMENT Module Structure Strategic Analysis o Intro o External analysis o Internal analysis Strategy formulation o Business strategy o Corporate strategy Strategy implementation o Entrepreneurial strategy o Technology strategy Assessments: 1. Individual: (50%) 60-minute 30Q multiple-choice test - W7 during seminar in-class test -> most comes from lecture material & a few from readings 2. Group-work: (50%) group 20-30min oral assessment (5ppl). Choose topic & research it. Critically review topic, understand application of theories/frameworks in topic, reflect on theory & application. Seminar tutor will ask Qs abt topic, including theory, practice & implications ******put unit code when emailing EFIMM0114 CONTENT A Multi-Perspective Field Definitions from boundary-spanners (those whose work involves strategic mang & one other) reveal diff perspectives: o Economist: "strategic mang = scientific stufy of plans that firms build & implement to achieve & maintain competitive advantage" o Sociologist: "study of how organizations create value, including not only 'the plan' but also the organizational configuration that it's combined w" o Management theorist: "SM = study of decisions & actions taken by top executives & teams for firms to be competitive in marketplace" Definitions of Strategy Kenneth Andrews = "pattern of objs, purposes, or goals & major policies & plans for achieving these goals, stated in way to define what business company = in or to be in & kind of company it is or is to be" Alfred Chandler = "determination of long-run goals & objs of enterprise, & adoption of courses of action & allocation of resource necessary for carrying out goals" Peter Drucker = "firm's theory abt how to gain competitive advtg" Michael Porter = "competitive strategy = being diff. deliberately choosing diff set of activities to deliver unique mix of value" o !!!!!!! TEST SUBJECT: Michael Porter introduced industrial organization into strategy The nature of strategy Strategy = o Long-term direction of organization o Gaining advantage over competitors o Addressing changes in the business env o Building on resources & competences (capability) Examples A café/hairdresser o No FIT bc health concerns *****FIT = an important concept in strategy Hotels in LDN o Ritz vs easyHotel 5 star vs easyjet hotel o Who's got a better strategy? ….different strategies…targetting diff customers It is about…. Intended (planned) strategy -> deliberate strategy -> realised strategy Other factors: emergent strategy (not planned)….ex.: online teaching bc it was necessary during COVID…wasn't planned but had to emerge with this strategy If deliberate strategy doesn't work then => unrealised strategy Levels of Strategy Ex: Disney o divisions Parks  Streaming platform Toy stores Movie business o Departments: w/in divisions = HR, marketing etc o EG.: Corporate strategy = for Disney… business strategy = for the Parks… functional strategies = for HR External Analysis Levels in the external env o "surroundings of an organization; climate in which org functions. Concept become challenging when we try to move from simple description of env to analysis of its properties" (Ginter & Duncan) o o Ex.: Coca-Cola Org = CocaCola Competitors = Pepsi Industry = beverage Macro-env = PEST (EL) Framework  o o Want low interest rate to be able to borrow money o Look out for inflation Industry Analysis……WILL BE IN TEST o Steps in industry analysis - can only be used to analyze business…not corporation bc a corporations can be in diff industries 1. Define industry boundaries i. Can be ricky, but don't obsess if it's "correct" ii. Consistent & useful iii. Define boundaries of industry…be specific 2. Map the key players i. Players can take on multiple roles ii. Begin w rivals… 1. Whether someone = classifies as competitor or substitute depends on industry definition  2. …& then their buyers & suppliers, substitutes, & potential entrants 3. …& make sure identify final customer, even if not direct customer a. Ultimately, value = created for that grp 3. Clarify whether the analysis = from perspective of an incumbent or entrant 4. Assess the power of each to influence prices, costs & volumes i. Now & in future FACTORS: 1. Rivalry intense if… i. Low concentration (ie no dominant players) ii. Undifferentiated product iii. Exit barriers iv. Rivals will sell even at low margins 1. Perishable prods 2. Large fixed & low marginal costs v. Low industry growth 2. Buyer power high if… i. High price sensitivity 1. Represents high share of buyers' total cost 2. Little impact on quality of buyers' own output ii. High bargaining sensitivity 1. Few buyers 2. Low switching costs 3. Undifferentiated product 4. Potential for backward integration 3. Supplier power high if…  i. Analysis = analogous to that of buyer power 4. Threat of entry high if… i. Low capital requirements ii. No economies of scale iii. Access to inputs iv. Access to distribution channels v. No switching costs for customers vi. No legal & regulatory barriers vii. No threat of retaliation 5. Threat of substitutes high if… i. No small diff in price-performance btwn industry's prod & substitute ii. Low switching costs for buyers when moving from industry's product to the substitute Interpreting industry analyses o Unattractive industry has: Low entry barriers Suppliers & buyers w strong bargaining positions Strong competitive threats from prod substitutes Intense rivalry among competitors o Attractive industry has: High entry barriers Suppliers & buyers w little bargaining power Few competitive threats from prod substitutes Relatively moderate rivalry  o ……..analysis of 5 forces w/in given ind allows firm to determine industry's attractiveness in potential to earn avrg or +avrg returns o Stronger competitive forces = lower potential to earn profits Criticism of 5 Forces o Six force: complements (Brandenburger & Nalebuf, 1996) Ex.: can't use iPhone w/out App Store apps o Static Not a dynamic framework you can analyze over time o No prediction Can only analyze what happened before o Not explain competitive advtg Bc internal factors "Strategy Reading: Introduction to Strategy" 2.2, 2.3, 2.4 and 2.5 Book Chapter 2.2 - The Integrated Set of Choices: Achieving Internal Stronger fit of choices = more robust business model & more difficult it is to replicate Need to make trade-offs, recognizing most important choice effective = involve decision to not do something else 2.2.1 - Business Models Examples of companies choosing diff sets of activities that form diff business models o BMW vs Ford  BMW = luxury vehicles for high-income consumers Ford Motor Company = wider product range intended for mass market o Walmart vs Others Walmart = mass merchandiser celebrates everyday low prices Harrods, DKM, Nordstrom = customers pay extra for high-end brands & better service o Cirque du Soleil = reinvented circus to create theatrical experience for adults, compared to traditional family-oriented traveling circus complete w elephants, lions, trapeze artists o IKEA vs Williams-Sonoma IKEA = low-prices, self-assembled home goods for customers on tighter budget Williams-Sonoma = premium housewares & furniture 2 fundamental considerations: o Value proposition & target market => most fundamental strategic choices for firm bc shape all other aspects of business model VP = based on differentiation or low cost. ▪ Differentiated firm offers product perceived to be better in some way than alternatives, increasing customer's willingness to pay ▪ Low-cost positioning attracts customers by offering lower prices or better value at low price - lower than competitiors TM = defined by scope…broad ("mass market") or narrow ("niche"/"focused") ▪ Eg. Cirque du Soleil = differentiated company focused on niche market Aldi = low-cost competitor aiming for mass market, trumpeting low prices as key attraction  o Goal = maximize gap btwn customer's willingness to pay (WTP) & company's cost…determined by supplier's opportunity cost (SOP) (smallest amount that supplier will accept for services & resources required to produce a good or service) Differentiated firm = increased customer's WTP o Usually requires increase in cost bc persuading customer to pay more = investing more resource in product or service o GOAL = increase price a lot while allowing costs to increase only a little o Firm on low cost = aims outcome that is mirror image: it increases price below competition, attracting price-conscious customers, while driving relative cost position as far down as possible o Can also be => driving costs below industry avrg & increasing customer's willingness to pay These firms generally locked customers & benefit from economies of scale that reduce costs relative to competitors Firm activities: o Product development o Procurement o Manufacturing o Deliveries o Sales  o Etc Underlying econ logic = chosen activities + right customer value delivered at right cost Example o Driving costs out of every are of businesses, Walmart, Aldi & Lidl can consistently offer lower prices to customers across product categories…attracting volume of purchases required to operate at low gross margins w discounting pricing 2.2.2 - Fit 1. For business model to work = firm's chosen activities need to demonstrate fit o Fit firm's value proposition (differentiated or low cost?) o Target market (broad or narrow?) 2. Choices should be mutually reinforcing o Choices fit w & strengthens the others o Choices like partnerships, target audience, product/service, locations. Etc 3. Choices should fit in a way that enables optimization of effort, enabling cost efficiencies among activities o Eg: IKEA = maintains lean operation by minimizing retail staff, offering self- service store experience, desinging modular furniture for self-assemble, ensuring stock available in store, placing largest stores outside urban centers o Optimizing choices: each decision makes others easier to execute & strengthens business model Ex: IKEA = desinged smaller stores for cities like NY 2.2.3 - Trade-offs A good business model demands trade-offs Limits on coordination & control w/in organization require trade-offs  The BM determines the tactics available to the firm as well as those that are not; certain tactics will be inconsistent, if not impossible BM succeeds when firm can profitably meet market demand w consistent choices, mutually reinforcing & collectively optimal 2.3 - Positioning on the Business Landscape Firm goal = maximize wedge btwn SOP & customers' WTP Competitive advantage when firms command & sustain larger wedge peers Business landscape metaphor = areas (market segments) of higher potential profit where wedge = widened -> visual for ways which firm engages w env Consistency (internally & externally) = key Strategic positioning = finding & occupying wedge points in landscape "me too" strategy = firms resembling one another => compete against each other w same offering, eroding industry profitability & achieving mediocre financial performance Acid test = imaginary state of world w/out the firm…would it be easily replaced? 2.3.1 - Different Target Market Rather than competing for household consumer market, redeploy skilled sales team to insitituional market, serve a diff target where there is less competition, customers are less fragmented & sales capabilities = better matched w market 2.3.2 - Different Business Model Alternative outcome continues to serve same market but changes business model…rebrand & reposition…backward integaration(controlling the supply of parts)?...enabling improved cost position improving firm's profitability 2.3.3 - Different Positioning & New Target Market Better prod/serv repurposed to reposition  WTP = higher, relevant retail channel = more fragmented, competition = almost nonexistent W patented prod can establish stron, defensible position on a new unexplored part of landscape 2.3.4 - Different Business Landscape Structural forces shaping landscape = not static Success could come through changing relationships Eg an exclusive alliance Shifts could lead to change in "topography"…creating new places & opportunities for value creation & value capture Eg.: Southwest airlines A successful strategy that can create a competitive advtg for company, requires integrated set of choices that demonstrate internal & external consistency o Now we think of sustaining superior performance for long term…dynamic consistency 2.4 - Performance over the Long Run  When achievied competitive advantage, maintaining dynamic consistency = dealing w threats Neither position nor model = permanent 2.4.1 - Recognizing External Threats Imitation o Self-evident o Profits draw a crowd o Any advantage based on prod or process innov = fleeting, even when protected by patent o Barriers to imitation Firm achieves economies of scale or scope (if large in specific market or interrelated markets), would-be imitators = deterred Convince potential competitors that profitable imitation = difficult ▪ Long-term contracts & relationships ▪ Institutional knowledge ▪ Network externalities ▪ Credible threat of retaliation ▪ Strategic complexity Substitution o Diff to predict & manage o Occur when demand shifts as result of changes in tech or customer needs o Can come from subtle prod benefits (eg. Calcium-enriched orange juice reducing sales of milk) o From unexpected places: COVID impacting tech o Businesses w threat of substitution can fight back by further differentating or incorproating benefits that are shifting demand  o If unavoidable, encourage substitution on your own terms Holdup o Occurs when the bargaining power of a firm's buyers, suppliers, or complements increases, allowing them to capture more value o Growing dependece on, or interdependence among parties can lead to greater overlap & conflict in claiming value o Mitigate threat of holdup by broadening base of suppliers or customers, establishing contractual protections, or pursuing vertical integration (taking over more of the activities in their supply chains) Internal barriers to response o Not all threats are external o Firm's prior success: oftern attempt to fit responses w/in existing strategies rather than acknowledging that challenge or opportunity may require new strategy w diff array of choices o Jan W Rivkin - internal barriers to response that hinder firm's reaction to external threats as failures….4 categories: Perception: "I don't see the threat" Motivation: "I see the threat, but don't want to respond" Inspiration: "I want to respond, but don't see how" Coordination: "I see how to respond, but can't get the organization to move" o Eg.: brick-and-mortar firms vs online competitors 2.4.2 - Maintaining Success Over Time Think of threats of imitation, substitution & holdup as reversal of decisions & factors behind successful strategy If firm = competitive advantage = bc figured out profitable way to thrive in its position on business landscape Threats to sustainability exist bc structural forces = not static  Imitation & substitution = problems of new entrants or increase in # of rivalries or substition = realized Holdup = balance of power shifts toward suppliers, buyers or competitors Dynamic consistency requires vigilance to ensure threats = well understood & kept at bay 2.5 - What is Next? Strategy = an integrated set of choices that position the firm to generate superior returns over the long run Sept. 17 What is Strategy? Michale E. Porter Article Operational Effectiveness is Not Strategy Positioning = rejected as too static for today's dynamic markets & changing techs Hypercompetition = self-inflicted wound, not inevitable outcome of changing paradigm of competition Root of prob = failure to distinguish btwn operational effectiveness & strategy Quest to productivity, quality & speed brought mang tools & techniques = total quality mang, benchmarking, time-based competition, outsourcing, partnering, reengineering, change mang Mang tools have taken place of strategy  Operational effectiveness: necessary but not sufficient o Company can outperform rivals only if can establish difference that can preverse Must deliver greater value to customers or create comparable value at lower cost or both Diffs btwn companies in cost/price derive from activities required to create, produce, sell, deliver prods/services…ie calling customers, assembling final prods, training employees Cost = generated by performing activities cost advantage = from performing particular activities more efficiently than competitors Differentiation = from both choice of activities & how they are performed Activities = basic units of competitive advantage Operational effectiveness (OE) = performing similar activities better than rivals perform them o Includes effciency o Referes to any # of practices that allow company to better utliize inputs Strategic positioning = performing different activities from rivals' or performing similar activities in diff ways Diff in operational effectivenes = source of diffs in profitability among competitors bc directly affect relative cost positions & levels of differentiation Productivity frontier = sum of all existing best practices at any given time….=max value company delivering particular prod or serv can create at a given cost, using best available tech, skills, mang techs, purchased inputs o Constantly shifting outward bc new techs & mang approaches Lean production = family of activities…allowed improvements in manufacturing productivity & asset utilization Outsourcing & virtual corporation = show that difficult to perform all activities as productively as specialists OE competition shifts the productivity frontier outward, raising the bar for everyone  Improved OE = insufficient --competitive convergence-- = more subtle & insidious o The more benchmarking companies do, the more they look alike o The more outsourcing they do, the more generic those activities become o Competition based on OE alone = mutually destructive o Driven by performance pressures but lacking strategic vision…companies buy up their rivals Competitiors left outstanding often outlast others o Managers have let OE supplant strategy => zero-sum competition, static or declining prices, & pressures on costs that compromise companies' ability to invest in business for long term Strategy Rests on Unique Activities Competitive strategy = being different Most managers describe strategic positioning in terms of their customers Essence of strategy = activities….choosing to perform activities differently or to perform diff activitities than rivals The Origins of Strategic Positions Emerge from 3 distinct sources o Positioning can be based on producing a subset of an industry's prods or services Variety-based positioning -> bc based on choice of prod or service varieties rather than customer segments ▪ Makes economic sense when company can best produce particular products or services using distinctive sets of activities Needs-based positioning -> Serving most or all the needs of a particular grp of customer ▪ Arises when there are grps of customers w differing needs, & tailored set of activities can serve those needs best ▪ Variant of needs-based positioning arises when same customer has diff needs on diff occasions or for diff types of transactions Eg.: same customer diff needs when travelling for business vs pleasure ▪ " Differences in needs will not translate into meaningful positions unless the best set of activities to satisfy them also differs " Access-based positioning -> Similar needs to other customers, best configurations of activities to reach them = different ▪ Segmenting customers who are accesible in different ways  Access = function of customer geography or customer scale- or anything that requires diff set of activities to reach customer in best way ▪ Segmenting by access = less common ▪ Eg: access driving differences in activities = rural vs urban- based customers Whatever basis (variety, needs, access or all 3) -> positioning requires tailored set of activities bc always funciton of differences on supply side…differences in activities o Positioniing = not always function of differences on demand or customer side….variety & access positionings don't rely on any customer differences o Variety/access differences often accompany needs differences Finding New Positions: The Entreprenurial Edge o STRATEGY o The creation of unique & valuable position, involving different set of activities A Sustainable Strategic Position Requires Trade-Offs 1. Choosing a Unique Position is Not Enough  - Imitation by competitors is inevitable. - Competitors copy in two ways: - Repositioning: Competitor changes its position to match the leader (e.g., J.C. Penney transitioning from a Sears-like store to a more upscale retailer). - Straddling: Competitor maintains its current position but adds features from the leader’s strategy (e.g., Continental Lite mimicking Southwest while keeping full-service elements). 2. Example of Imitation - Airline Industry - Continental Airlines tried to compete in both full-service and low-cost segments but failed due to inefficiencies. - Trade-offs, like offering meals vs. cutting costs, are necessary. 3. Trade-offs Protect Against Imitation - Definition: A trade-off occurs when doing more of one thing means doing less of another (e.g., serving meals adds cost and slows down service). - Example: Neutrogena made trade-offs by focusing on premium, pH-balanced soap, sacrificing mass-market appeal and manufacturing efficiencies. 4. Why Trade-offs Happen - Image/reputation: Companies may lose credibility if they try to do two conflicting things (e.g., Ivory Soap can't compete with Neutrogena's premium image). - Activities: Different positions require different configurations (e.g., Ikea’s low-cost model requires customer assembly, so it can't offer high-end service). - Internal limits: Clear trade-offs help avoid confusion among employees and set organizational priorities. 5. Trade-offs Are Essential for Strategy - They force companies to choose and limit what they offer.  - Trying to do everything leads to inefficiencies and undermines strategy (e.g., Continental Lite failed due to conflicting goals). 6. Trade-offs in Practice - Example of cost vs. quality: Honda and Toyota had to cut features to reduce car costs. - Without trade-offs, companies would lose any competitive advantage, and all progress would come from operational effectiveness. 7. Conclusion: Strategy is Making Trade-offs - The essence of strategy is deciding what not to do - Trade-offs are key to achieving a sustainable competitive advantage. Without them, companies would just imitate others. Fit Drives Both Competitive Advantage and Sustainability 1. Strategy vs. Operational Effectiveness - Operational effectiveness = performing individual activities well. - Strategy = focuses on how these activities fit together and complement each other. 2. Southwest Airlines Example - Southwest achieves rapid turnaround times not just through individual actions but through how activities fit together (e.g., no meals, flexible crews, standardized planes). - It's the system of activities that gives Southwest its competitive advantage, not one isolated action. 3. Fit and Competitive Advantage - Fit = among a company's activities creates a cohesive system that enhances economic value by reinforcing each activity.  - One activity’s cost is reduced or value is increased due to how other activities are performed. - The stronger the fit, the harder it is for competitors to imitate. 4. Types of Fit - First-order fit: Consistency between individual activities and overall strategy (e.g., Vanguard's cost-saving strategies align with its low-cost position). - Second-order fit: Activities reinforce each other (e.g., Neutrogena’s hotel and medical marketing strategies complement each other). - Third-order fit: Optimization of effort where activities work together to minimize inefficiencies (e.g., The Gap's frequent restocking system boosts inventory turnover). 5. Why Fit Matters for Sustainability - A system of interconnected activities is much harder to imitate than individual activities. - The more complex the system, the more difficult it is for rivals to replicate the entire strategy, making competitive advantage more sustainable. - Fit also pushes continuous improvement, as weaknesses in one area affect the whole system. 6. Example: Continental Lite’s Failure - Continental Lite tried to imitate Southwest but failed because it didn’t match the full system of activities. - Partial imitation without considering the whole system leads to poor performance. 7. Strategic Fit Encourages Improvement - When activities are tightly connected, improving one will positively affect others. - Conversely, weaknesses in one area degrade overall performance, exposing inefficiencies quickly. 8. Strategic Positioning and Long-Term Success - Sustainable strategic positions need to last for a decade or more, allowing continuous improvement and deep integration across activities. - Frequent shifts in strategy cause disruptions, leading to inconsistencies and "me-too" configurations that lack coherence. 9. Conclusion: Strategy is Fit - A successful strategy is not about excelling in a few areas but about integrating all activities into a cohesive system. - Without fit, there is no distinctive strategy, only operational effectiveness driving performance. Rediscovering Strategy The Failure to Choose - Reasons for Lack of Strategy: - Managers avoid making difficult choices. - Strategies often decay due to internal organizational failures. - Misguided views on competition and the desire to grow undermine strategy. - Misconception About Trade-offs: - Many companies operate far from the productivity frontier, leading to the false belief that trade-offs are unnecessary. - Managers, influenced by popular business trends, see trade-offs as a sign of weakness. - Imitation of competitors and chasing every new technology can erode strategy. - Operational Effectiveness vs. Strategy: - Operational effectiveness = concrete, actionable, and highly pursued, but it’s not a substitute for strategy. - Managers often fail to recognize the need for a clear strategic position, focusing solely on operational improvements. - Other Reasons for Strategy Blurring: - Industry conventions and customer focus lead to over-extension of services. - Organizational fears of blame or making a "bad" choice result in no real choices being made. - Herd behavior among companies leads to imitation, rather than innovation. The Growth Trap - Impact of Growth on Strategy: - Desire for growth leads to over-expansion, diluting focus and weakening the original strategic position. - Companies add new products/features, imitate competitors, and broaden their scope, causing strategic confusion. - Examples: - Maytag: Lost its strategic focus by expanding into refrigerators and other appliances beyond washers and dryers. - Neutrogena: Diluted its brand by broadening its product line to include non-core items like eye-makeup remover. - Consequences of Growth: - Compromises and inconsistencies arise, reducing fit and undermining competitive advantage. - Increased revenue is often pursued, but profitability suffers. - Managers fail to make strategic choices, leading to a cycle of broadening and compromise. Profitable Growth - Growth While Preserving Strategy: - Focus on deepening the strategic position, rather than broadening and compromising it. - Leverage existing systems and complementary activities to offer features rivals can't easily replicate. - Better penetrate the needs of distinctive customers, rather than expanding into new, undifferentiated markets. - Globalization and Focused Growth:  - Expanding globally can reinforce a unique strategy, unlike broadening domestically. - Contain risks of strategic dilution by creating stand-alone units for different brands/products. The Role of Leadership - Leadership's Importance: - Strong leadership is crucial for defining and maintaining a clear strategy. - The leader’s role is to make trade-offs, enforce discipline, and avoid compromises. - Leadership must guide the organization in understanding strategy and making informed choices. - Strategy vs. Operational Effectiveness: - Strategy focuses on defining a unique position and making trade-offs. - Operational effectiveness involves continuous improvement but doesn’t replace strategy. - Strategic Continuity: - Companies need ongoing efforts to improve and extend their unique position. - Strategic changes should only occur when new trade-offs are discovered or new complementary activities emerge.