Strategic ManagementMGMT S-5000 (32759), Summer, 2011

Tuesday/Thursday, 3:15-6:15 PM, Sever 203

Sharon A. Mertz

S-5000 – Strategic Management

Topics:

• Welcome

• Course Outline & Overview

• Evaluation (refer to syllabus for guidance):• Class Participation – 20%• Case Analyses (2 x 15%) – 30%. Work with a partner or individually.• Group Research Projects/Presentations – 20%.

• Final Case - 30% - individual effort

• Expectations

• Introducing Strategic Management

• Group Work

2

Chapter 1Introducing Strategic Management

4

OBJECTIVES

1

2

3

4

5 Understand why we study strategic management

Recognize the difference between a fundamental and a dynamic competitive advantage

Describe the determinants of competitive advantage

Understand the relationship between strategy formulation and implementation

Understand what a strategy is and identify the difference between business-level and corporate-level strategy

5

UNDER ARMOUR AT A GLANCE

1996 2006

Revenues $17,000 $430,000,000

Net Income 0 57,300,000

Equity Value 0 1,800,000,000

Brands and Trademarks Under Armour, HeatGear, ColdGear, AllSeasonGear, LooseGear, Click Clack

Kevin Plank’s Vision To become the world’s #1 performance athletic brand

6

STRATEGY

General

Lower officer (e.g., supply logistics infantry, heavy armored vehicles)

Strategos: “the general’s view”

Holistic “big picture”

Tactical details

7

THE MILITARY ROOTS OF STRATEGY

“The individualist without strategy who takes opponents lightly will inevitably become the captive of others.”

– Master Sun

8

THREE OVERARCHING THEMES

Implementing a good strategy is at least as important as creating one, yet many managers give too little thought to implementation

Strategic leadership is responsible for

making substantive resource allocation decisions and

developing key-stakeholder support of the strategy

We need to see a firm’s competitive position, not as a snapshot, but as an ongoing movie

Firms and industries are

dynamic in nature

To succeed,the formulation

of a good strategy and its implementa-

tion should be inextricably connected

Strategic leader-ship is essential if a firm is able to both

formulate and imple-ment strategies that

create value

BUSINESS STRATEGY AS AN ACADEMIC DISCIPLINE

9

• Relatively recent – gained significant traction since the 1960’s• Many perspectives – Whittington provides one example:

Source: Whittington, What is Strategy - and does it matter? (2005)

Internally focused Externally focused

Classical Processual Evolutionary Systemic

Strategy Formal Crafted Effi cient Embedded

Rationale Profit maximization Vague Survival Local

Focus Internal (plans)Internal (politics/cognitions)

External (markets)External (societies)

Processes Analytical Bargaining/Learning Darwinian Social

Key Influences Economics/military Psychology Economics/biology Sociology

Key AuthorsChandler; Ansoff; Porter

Cyert & March; Mintzberg; Pettigrew

Hannan & Freeman; Williamson

Granovetter; Whitley

Emergence 1960s 1970s 1980s 1990s

10

THE STRATEGIC MANAGEMENT PROCESS

Strategic analyses

• Internal

• External

Vision and mission

• Fundamental organizational purpose

• Organizational values

Strategy

• Arenas• Vehicles• Differentiators• Staging• Economic logic

The central, integrated, externally oriented

concept of how a firm will achieve its

objectives

Implementation levers

and

Strategic leadership

11

QUESTIONS OF CORPORATE-LEVEL AND BUSINESS-LEVEL STRATEGYUnit of measure

??

Corporate-level strategy should ask

• In which markets do we compete today?• In which markets do we want to

compete tomorrow?• How does our ownership of a business

ensure its competitiveness today and in the future?

• How do we compete in this market today?

• How will we compete in this market in the future?

Business-level strategy should ask

ADDITIONAL CHALLENGES AND OPPORTUNITIES CONFRONT DIVERSIFIED BUSINESSES

12

In which businesses will we compete?

How can the corporate parent added value to the various lines of business?

How will diversification or entry into a new industry enable us to compete in our other industries?

13

STRATEGY AND IMPLEMENTATION ITERATE WAL-MART EXAMPLE

Strategy:The process of deciding what to do

Implementation:The process of performing all the activities necessary to do what has been planned

Compete as discount retailer in rural markets

Leverage inventory and sourcing systems to be low-cost leader

Invest heavily in organizational structure, systems, and processes

14

UNPLANNED ACTIONS CAN DRIVE STRATEGY

Intel’s original focus (1970s & 1980s)

Design and manufacture of Dynamic, Random-Access Memory Chips (DRAM)

Unplanned experimental venture to make microprocessors for Busicom, a Japanese calculator maker

Focus on micro-processor segment

By 1984, 95%of Intel revenue came from the microprocessor segment

15

BUSINESS STRATEGY DIAMOND

Staging

Differentiators

Economic logic

Vehicles

Arenas

• What will be our speed and sequence of moves?– Speed of expansion?– Sequence of initiatives

Staging

• How will returns be obtained?– Lowest costs through scale

advantages?– Lowest costs through scope

and replication advantages– Premium prices due to

unmatchable service?– Premium prices due to

proprietary product features?

Economic logic

• How will we get there?– Internal development?– Joint ventures?– Licensing/franchising?– Experimentation?– Acquisitions?

Vehicles

• How will we win?– Image?– Customization?– Price?– Styling?– Product reliability?– Speed to market?

Differentiators

• Where will we be active? ( and with how much emphasis?)– Which product categories?– Which channels?– Which market segments?– Which geographic areas?– Which core technologies– Which value-creation strategies?

Arenas

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JET BLUE STRATEGY

Objective

To “bring humanity back to air travel”

Arenas• Low fare commercial air carrier• Underserved but over-priced US cities

Vehicles• Start from scratch and achieve all growth

internally (i.e., do not purchase a regional airline)

Differentiators• High level of service compared to low fare competitors

(e.g., leather seating, satellite TV)

Staging

• Grow from one route between two cities to serving 20 cities in just 3 years

Economic logic• Secure cost advantage by being willing and able to

perform key tasks differently– One type of plan– JFK home base– Secondary location

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GOALS OF STRATEGY IMPLEMENTATION

To make sure strategy formulation is comprehensive and well informed

1

To translate good ideas into actions that can be executed (and sometimes to use execution to generate or identify good ideas)

2

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IMPORTANCE OF EXECUTION

“The important decisions, the decisions that really matter, are strategic . . . [But] more important and more difficult is to make effective the course of action decided upon.”

– Peter Drucker

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FRAMEWORK FOR STRATEGY IMPLEMENTATION

IntendedStrategy

Realizedand

EmergentStrategies

Key Factors of Strategy Implementation

Implementation levers• Organizational structure• Systems and processes• People and rewards

Strategic leadership• Lever- and resource-allocation decisions• Decision support among stakeholders

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COMPETITIVE ADVANTAGE

Competitive Advantage: a Firm’s ability to create value in a way that its rivals cannot

Key question: how do Firms create sustained above-average returns?

21

THREE PERSPECTIVES OF COMPETITIVE ADVANTAGE

Dynamic

Suggests that in dynamic, rapidly changing markets, a firm’s current market position is not an accurate prediction of future performance. Instead, we look at the past for clues about how the firm arrived at its current position and to future trends – both internal and external – in an effort to predict the future landscape

Internal

Often called the “resource view”, contends that firms are heterogeneous bundles of resources and capabilities and firms with superior resources and capabilities enjoy competitive advantage over other firms. This advantage makes it relatively easier to achieve consistently higher levels of performance

External

Also called the “positional view”, contends that variations in a firm’s competitive advantage and performance are primarily a function of industry attractiveness. Companies should therefore either (1) position themselves to compete in attractive industries or (2) adopt strategies that will make their current industries more attractive

INTERNAL AND EXTERNAL DIMENSIONS OF THE DYNAMIC PERSPECTIVE

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• Competitive advantage can shift quickly in unstable markets

• External dimension: Useful for “high velocity” markets, or examining industriescharacterized by multi-market competition.

• Internal dimension: Identify which firm resources and capabilities enable corecompetency of embracing continuous or disruptive change

Chapter 2Leading Strategically Through Effective Vision and Mission

24

OBJECTIVES

1

2

3

4

5 Explain how ethics and biases may affect strategic decision-making

Identify a firm’s stakeholders and explain why such identification is critical to effective strategy formula-tion and implementation

Understand the roles of vision and mission in deter-mining strategic purpose and strategic coherence

Understand the relationships among vision, mission, values and strategy

Explain how strategic leadership is essential to strategy formulation and implementation

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PULLING A USD 15 BILLION COW OUT OF A DITCH

• Xerox introduces the Xerox 914 copier in 1959. This copier transformed the work place

• Xerox was charter member of the “nifty 50”-50 stocks most favored by institutional investors

• Since 1970s, however, Xerox has been crippled by competition (mostly Japanese)

• October 2001, Xerox reports first quarterly loss in16 years. Mulcahy is not obvious choice for top position

• She lacks product development and financial expertise

• She gets it because the board has confidence in her “strategic mind”.

• Refines Xerox vision and reminds people of core values

• Aligns operation with the refined mission and values

• Sells Xerox’s China and Hong Kong operations and half of a stake in a joint venture with Fuji

• Closes down inkjet business

• Annual expenses cut by USD 1.7 billion

• Sold USD 2.3 billion worth of non-core assets

• Reduced long-term debt to USD 9.2 billion from USD 15.6 billion

• Xerox returns to profitability in 2002, generating USD 1.9 billion in operating cash flow and USD 91 million in net income on USD 15.8 billion in sales

The fall from the nifty 50

Mulcahy takes over

She leads a turnaround

Xerox reaches profitability

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STRATEGIC LEADERSHIP – THE BASIC RESPONSIBILITY OF THE CEO

The task of exerting influence on other people’s pursuit of goals in an organizational context

Leadership:

Managing an overall enterprise and influencing key organizational out-comes, such as company wide performance, competitive superiority, innovation, strategic change, and survival

Strategic leadership:

" "I can't think of anything that isn't cloud computing with all of these announcements. The computer industry is the only industry that is more fashion-driven than women's fashion. Maybe I'm an idiot, but I have no idea what anyone is talking about. What is it? It's complete gibberish. It's insane. When is this idiocy going to stop?"

"Larry Ellison's Brilliant Anti-Cloud Computing Rant"The Wall Street Journal, 25 September 2008

SOME BUSINESS LEADERS BECOME CELEBRITIES

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EXECUTIVE ROLES

Formal authority and status

Interpersonal roles• Figure head• Leader• Liaison

Informational roles• Monitor• Disseminator• Spokesperson

Decision roles• Entrepreneur• Disturbance handler• Resource allocator• Negotiator

29

LEVEL 5 LEADERS

Level 5leaders

Build greatness through combination of will and humility

Level 4 leadersCan lead a group to superior levels of performance

Level 3 leadersOrganize people resources to accomplish predetermined objectives

Level 2 leadersWork effectively with others as a member of a team to achieve group objectives

Level 1 leadersMake individual contributions through talent and work ethic

Capabilities

30

Professional modesty

TWO ATTRIBUTES OF LEVEL 5 LEADERS

Professional will

•The ability to translate strategic intent into the resolve needed to pursue a strategy

•and usually to make hard choices over a period of time

Being someone

• who prefers to share credit rather than hog it

• who tends to shun public attention,

• act with calm determination, and

• exercise ambitions on the company’s behalf rather than one’s own

“You can accomplish anything in life, provided that you do not mind who gets the credit.”

- Harry S. Truman

31

WHAT DOES IT TAKE TO BE A CEO?

Charisma?

There is little consensuson whether personality or background matters more

An Ivy league MBA?

Integrity

International management experience?

32

CRITERIA OF AN EFFECTIVE TOP-MANAGEMENT TEAM

1.The team responds to a complex and changing environment.

2. The team can manage the needs of interdependent but often diverse units, arenas, or functional areas.

3. The team has a valuable and effective social network.

4. The team is able to develop a coherent plan for executive succession.

“Social” is Not a New Phenomenon• Research began in the late 1800’s: Durkheim and Tönnies

• Tönnies : social groups exist as personal or direct social ties, either linking individuals who share beliefs (Gemeinschaft) or impersonal, formal and instrumental social links (Gesellschaft)

• Early 20th century: Simmel, explores the structural patterns of social interactions

• 1930’s onward: interest grows at institutions such as Harvard, University of Chicago, University of Toronto, and others.

• The area is researched by many; a few major contributors and example research topics:• Granovetter: The Strength of Weak Ties• Freeman: Visualizing Social Networks (importance of imagery in network research)• Wellman: Computer Networks as Social Networks; Internet Effect on Social Capital

“SOCIAL” IS NOT A NEW PHENOMENON

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VISION, MISSION AND STRATEGY

Vision and Mission

• Fundamental purpose• Values• View of future

Strategic Goals and objectives

• Specific targets• Measurable

outcomes

StrategyThe central, integrated,

externally-oriented concept of how the firm will achieve its objectives. Consists of

5 elements: arenas, vehicles, differentiators, staging, and economic

logic

35

VISION – USES OF AMBITION AND AMBIGUITY

Sony’s vision in early 1950’s:“becoming the company that most changes the worldwide image of Japanese products as being of poor quality.”

CitiBank’s vision in 1915:“the most powerful, the most serviceable, the most far reaching world financial institution the world has ever seen.”

Vision statements

• generally express long-term action horizons,

• are ambitious and force the firm to stretch.

• their ambiguity allows flexibility for changing strategy or implementation tactics

EXAMPLE – AN EXCERPT FROM THE SAP MISSION STATEMENT

36

Our mission is to help the world run better in order to create enduring prosperity for people everywhere.

We help customers around the globe perform at a significantly higher level of effectiveness and efficiency by enabling closed-loop performance optimization to achieve profitable, sustainable growth. To succeed, we strive to build from our established leading position in the business software market and accelerate business and IT innovation for firms and industries.

In reaching for this goal, we are also contributing to global economic development on a grand scale.

Sap 20F, March, 2009

37

VISION ANCHORED IN GOALS AND OBJECTIVES

Vision

Goalsand objectives

Examples

Wal-Mart Grow sales and profits by 70% per year

Ryanair Be Europe’s largest airline in 7 years

Matsushita To become a “super manufacturing company”

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STRATEGY COHERENCE

• The symmetrical co-alignment of the five elements of a firm’s strategy

• The congruence of policies in functions (e.g., finance, production, marketing) with these elements

• The overarching fit of various businesses under the corporate umbrella

Strategic coherence is

Staging

Differentiators

Economic logic

Vehicles

Arenas

Congruence

39

BENEFITS OF USING STAKEHOLDER ANALYSIS

1.Can use the opinions of the most powerful stakeholders to shape your strategy and tactics at an early stage.

2.Gain support from powerful stakeholders to help win more resources.

3.Can ensure that stakeholders fully understand what you are doing and understand the benefits of your project.

4.Can anticipate what people’s reactions to your project may be and build actions into the plan that will win people’s support.

40

STAKEHOLDER ANALYSIS

Stakeholders: Individuals or groups who have an interest in an organization’s ability to deliver intended results and maintain the viability of its products and services

Steps in identifyingstakeholders

1. Determine influences on strategy formulation decisions

2. Determine stake-holders power and influence over strategy execution decisions

3. Determine the effects of strategic decisions

After identifying stakeholders ask

• Have I identified any vulnerable points in either the strategy or its potential implementation?

• Which groups are mobilized and active in promoting their interests?

• Have I identified supporters and opponents of the strategy?

• Which groups will benefit from successful execution of the strategy and which may be adversely affected?

• Where are various groups located? Who belong to them, and who represents them?

41

MAPPING STAKEHOLDER INFLUENCE AND IMPORTANCE

UnknownLittle/Noimportance

Moderateimportance

Significant importance

Influence ofstakeholder

Unknown

Little/Noimportance

Moderateimportance

Significant importance

Importance of Stakeholder

STAKEHOLDER MANAGEMENT PLAN

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Corporate Governance – the role of owners, directors, and Managers in making corporate decisions

Governance Sets the Boundaries

Governance frameworks focus on internal control:

• The reliability and integrity of (financial) information • Compliance with policies, plans, procedures, laws and regulations • The safeguarding of assets • The economical and efficient use of resources• The accomplishment of established objectives and goals for operations or

programs

44

Implementation – Executing new strategy to realize goals

ETHICS AND BIASES

Is the decisionethical?

Have any potential biases clouded our decision-making process?

• Common illusions about ourselves (e.g., favorability optimism , control)

• Escalating commitments• Self-serving fairness bias • Overconfidence bias• Ethnocentrism and stereotyping • Risk assessment

New strategy –A new means to accomplish goals

• Authority structures• Incentive systems• Role of corporate

governance