An Overview of Strategy: Past, Present, and Future James Oldroyd Kellogg Graduate School of Management Northwestern University [email protected]
Dec 27, 2015
An Overview of Strategy: Past, Present, and Future
James OldroydKellogg Graduate School of ManagementNorthwestern University
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Overview of Strategy
Definition and Brief History of Strategy Industry Strategy Firm Strategy Business Unit Strategy Current Trends in Strategy
Business Building Growth Short-term and Long-term
Conclusion
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Are these Strategies?
“Become a $125 billion company by the year 2000”
(1990)
“Become the company most known for changing
the worldwide poor-quality image of Japanese products” (1950s)
“Crush Adidas” (1960s)
“Become the Harvard of the West” (1940s)
"A PC on every desktop and in every home," to the broader (and, yes,
even more ambitious) "Great software anytime, anyplace and on
any device"
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Strategy is about being different. It means deliberately choosing a different set of activities to deliver a unique mix of value
What is Strategy?
Merriam Webster Dictionary
Michael Porter
Hamel and Prahalad
Resource-based view
The science and art of military command exercised to meet the enemy in combat under advantageous conditions
The use of valuable, rare, non-substitutable, and appropriable resources and capabilities to
create sustainable advantage
Leverage of core competence to achieve competitive innovation (changing the rules of the game). It as about being different.
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Strategy as ArtThe Military Analogy
Von Clausewitz view of strategy:
Strategy was not a formula. Detailed planning always failed due to change events, imperfections in execution, and the leadership of the opposition.
Strategy was the art of the broken-field runner; strategy was not a lengthy plan, but an idea that evolved through changing circumstances.
Strategy involved the instinctive savvy of the best generals
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Demand for Strategy and the Rise of Strategy as Science
Single Business Firms
Post WWII
Multi-divisional Firms
New Managerial Problems: What to buy?
What to sell?
How to allocate resources?
How to achieve synergy?
Strategy as an art is no
longer adequate
Intuition and experience alone cannot manage the multi-divisional firm
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Strategy is….
Kenneth Andrews, The Concept of Corporate Strategy” (pp.18-19).
Business DefinitionBusiness Definition
Key Success Factors
Key Success Factors
Core Competencies
Core Competencies
Competitive Analysis
Competitive Analysis
• What Customers groups served?
• What customer needs do you satisfy?
• How might your markets change with time?
• Existing and potential competitors
• SWOT• Unique core
competencies• Assumptions• Future moves
• What do you do well compared to competitors?
• What do you need in the future?
• What really makes the difference between success and failure?
• What will factors will change in the future?
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Three Levels of Business Strategy
FirmFirmBusiness
UnitBusiness
UnitIndustryIndustry
Strategic Advantage
Choose Your Sandbox
Business Definition
Firm Resources
Which Business Units?
Business Unit Boundaries
Managing Cross Business Synergies
9
Overview of Strategy
Definition and Brief History of Strategy Industry Strategy Firm Strategy Business Unit Strategy Current Trends in Strategy
Business Building Growth Short-term and Long-term
Conclusion
10
Industry Strategy
FirmFirmBusiness
UnitBusiness
UnitIndustryIndustry
Strategic Advantage
Choose Your
Sandbox
Business Definition
Firm Resources
Which Business Units?
Business Unit Boundaries
Managing Cross Business Synergies
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Average Annual Returns of U.S. Manufacturers 1970-1990
ROE ROAROSDrugs 21.4% 11.8%13.1%Food and Kindred Products 15.2 6.63.9Chemicals and Allied Products 15.1 7.57.2Fabricated Metal Products 12.3 5.73.7Motor Vehicles and Equipment 11.6 5.63.7Textile Mill Products 9.3 4.32.5Iron and Steel 3.9 1.51.3
Source: Anita McGahan, Harvard Business School
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Year2% Industry
18%Corporate
parent4%
Business segment
30%
Transient46%
In the U.S., corporate strategy is typically the icing on the cake, not the cake itself
• Business units must be competitive on their own merits
• …in attractive industries• But the icing can make the decision
difference between a good cake and a bad one
Source: Anita M. McGahan and Michael E. Porter, “How Much Does Industry Matter Really?” Strategic Management Journal, 1997
Year3% Industry
10%Business Group11%
Firm34%
Transient42%
In much of the rest of the world, corporate strategy is more prominent
Membership in a diversified entity has a larger effect on profitability
The effect on profitability is more likely to be positive
U.S.Rest of World
Source: Tarun Khanna and Jan W. Rivkin, “Estimating the Performance Effects of Business Groups in Emerging Markets,” Strategic Management Journal, 2000Countries: Argentina, Brazil, Chile, India, Indonesia, Israel, Mexico, Peru, the Philippines, South Africa, South Korea, Taiwan, Thailand, and Turkey
A Cautionary NotePeople began to notice problems with the industry approach…
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Persistence of Superior Returns by Industry
The Typical cross-country correlation in in dusty profitability is extremely weak
Source: Tarun Khanna, Harvard Business School
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Persistence of superior returns 1980-1989
Source: Geoff Waring, “Industry differences in the persistence of Firm-specific Returns” 1996
Industry
% if above average return retained each
year
% remaining after 10 years
Cigarettes 100 100Soft Drinks 83 14.5Malt beverages 79 9.5Paper Mills 78 8.3Metal Cans 78 8.3Pharaceuticals 72 3.7Toiletries 72 3.7Steel mills 67 1.8Periodicals 67 1.8Aircraft engines 67 1.8Book publishing 64 1.1Cement 64 1.1Bolts 62 0.8Vehicle Parts 59 0.5Cars 59 0.5Aircraft parts 55 0.2Petroleum refining 54 0.2Surgical instruments 54 0.2Radio & TV 53 0.2Mobile homes 53 0.2Meat packing 52 0.1Plastic products 50 0.1Electronic components 48 0.1Process control 46 0Computers 45 0Semiconductors 44 0
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Overview of Strategy
Definition and Brief History of Strategy Industry Strategy Firm Strategy Business Unit Strategy Current Trends in Strategy
Business Building Growth Short-term and Long-term
Conclusion
16
Firm Strategy
FirmFirm Business Unit
Business Unit
IndustryIndustry
Strategic Advantage
Choose Your Sandbox
Business Definition
Firm Resources
Which Business Units?
Business Unit Boundaries
Managing Cross Business Synergies
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Value Creation and a Firm’s Positioning
Willingness to Pay
Supplier opportunity cost
Total value
created
Customer
Supplier
Firm
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Value Division
Customer
Supplier
Firm
Willingness to Pay
Supplier opportunity cost
Cost
Price
Value Captured by Customer
Value Captured by Firm
Value Captured by Supplier
Added Value is the total value created with the firm in the game – total value created without the firm in the game or the value that would be lost to the world if the firm disappeared. A firm cannot capture more
than its added value.
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Examples of Added Value
Dual Advantage
Willingness to Pay
Supplier opportunity
cost
Differentiation
Goldman Sachs
Merrill Lynch
McDonald’sBurger King
Low Cost
Wal-mart
K-mart
Mom and Pop
Store
20Source: Adapted from Treacy and Wiersema, The Discipline of Market Leaders. Perseus Books. 1995
Generic Strategies
Customer Intimacy
Customer Intimacy
Product LeadershipProduct
Leadership
Operational Excellence
Operational Excellence
Faster
Better
Closer
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Value Added and Competitive Advantage
• Added Value - Goal is to drive a wedge between willingness to pay and (supplier opportunity) cost
•Problem: a firm must often incur higher costs to deliver a better product or service
Willingness to Pay
Supplier opportunity cost
Cost
Price
Value Captured by Customer
Value Captured by
Firm
Value Captured by
Supplier
Value Added
Competitive Advantage
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Strategies for Shaping the Wedge
Value
Price
High
Low
Cost-to-ServiceHighLow
Industry Pressures
Strategic Moves
Value Added Strategy Sony
Segmentation Strategy Mercedes Charles Schwab
Service Innovation DELL
Coca Cola
Process Innovation
Wal-mart
Source: Adapted from “Beating the Commodity Magnet” V. Kasturi Rangan and George Bowman. Harvard Business School Note 1994
Strategic Moves
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Mini-Case: Marketing Strategy at Delta
In the mid 1980s Delta’s market researchers found that customers (particularly business customers) were strongly influenced to choose a particular airline by the airline’s frequent flyer program. Consequently, to motivate customers to choose Delta, they teamed up with American Express (an exclusive arrangement) to offer a special program: customers could receive triple miles if they would fly on Delta and purchase the tickets using the American Express card.
How would you evaluate Delta’s strategy? (Good or bad?)
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Constraints of Strategy
Environment•Pressures
•Constraints•Opportunities
•Stability or Change
Resources•Availability
•Future scarcity
History•Key Events
•Organizational Change
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Overview of Strategy
Definition and Brief History of Strategy Industry Strategy Firm Strategy Business Unit Strategy Current Trends in Strategy
Business Building Growth Short-term and Long-term
Conclusion
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Business Unit Strategy
FirmFirmBusiness
UnitBusiness
UnitIndustryIndustry
Strategic Advantage
Choose Your Sandbox
Business Definition
Firm Resources
Which Business Units?Role definition and integration
Business Unit BoundariesExternal and Internal
Managing Cross Business Synergies
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Which Business Units?
HighRelative Share
LowHigh
Market Growth Rate
Low
Cash Cow
Star
DogProblem Child
RelativeShare
Focus on Market Share
Boston Consulting Group Portfolio Model
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Which Business Units?
Har
vestH
old
Bui
ld
Business Unit Position
High Med Low
Industry Attractivene
ss
Low
M
ed
Hig
h
General Electric Model
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Business Unit Boundaries• Our business are organized around a market and when a market changes the business unit fails.• We miss opportunities that fall between business units.• Our organization is set in stone, it is impossible to change.
Source: Adapted from Kathy Eisenhardt, Stanford, 2002
Common Complaints
• Regard match of business portfolio to markets as temporary• Pay attention to SCALE of businesses as well as focus• Patching executive at multibusiness level• Economies of scale AND agility
Solution
Traditional RV Market Segments Honda Segments
Minivans
Station wagon
Compact sedans
Sport utility vehicle
Odyssey:Shorter than a minivan but bigger than
station wagon
Criteria:Compact-cum-wagon with “Godzilla”
styling
CR-V:Similar to Jeep Cherokee but smaller and built on the Honda Civic platform
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Example –
1994 1996 1998
Large customers Large companies Global enterprises
Small customers Midsize companies
Government and education
Small customers
Large companies
Midsize companies
Federal
State and local
Education
Small companies
Consumers
Source: Adapted from Kathy Eisenhardt, Stanford, 2002
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Business Unit Synergies• Senior management wants cross-business synergies, but is unsuccessful• Orchestrating collaboration across businesses is a time sink
Common Complaints
• A few temporary collaborations with exceptional payoffs• Manage NUMBER of collaborations, not just focus• Senior managers set context for collaboration, businesses decide• Synergies AND individual business success
Solution
• sharing movie characters across businesses • Selective collaboration (e.g., Disney characters not
shared with Touchstone)• Senior executives set collaborative context (e.g.,
synergy meetings, calendar, synergy managers, training boot camp), but business managers make the choices
• “Key to earning a big return is to replicate knowledge” – John Browne, CEO
• SBUs belong to 1 of 4 peer groups for knowledge exchange, facilitated by electronic yellow pages
• Participation is voluntary and comes out of SBU budget
Source: Adapted from Kathy Eisenhardt, Stanford, 2002
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Tests of Corporate Synergy
Weak tests:
Does the portfolio outperform a benchmark portfolio of otherwise comparable but focused companies?
Is the business better off as part of the corporation than it would be by itself?
Stronger tests:
Does each business unit within the corporation outperform comparable focused companies?
Is the business better off as part of this corporation than it would be under any other parent or organizational arrangement?
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Overview of Strategy
Definition and brief history of Strategy Industry Strategy Firm Strategy Business Unit Strategy Current Trends in Strategy
Business Building Growth Short-term and Long-term
Conclusion
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Business Building Imperative
What Percent of Companies will fall out of the S&P 500 by 2020?
Answer = 50%
95 90
50
CORNINGHandsets
Fiber opticsGlobal Services
Percent of Market Capitalization in December 1999 by Newly Created Businesses Within the Companies from 1990-1999.
Source: Adapted from McKinsey and Company, 2002
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The Role of Corporate and The Business Units
Create
Operate
Trade/ destroy
Business Unit’s Primary focus is to operate assets
Corporate primary focus is to create,
exchange, and destroy assets
Source: Adapted from McKinsey and Company, 2002
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Business Building Requires a Shift in Focus
Acquire/develop options on the periphery
Reduce time spent managing operations
Cannibalize/sell developed businesses
Electrical products
Aerospace, aero-engines, materials, technical support
Financial services
1987
Other products
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%100%
Revenue breakdown by business
1977 1997
General Electric’s evolving business portfolio mix
Broadcasting
Source: Adapted from McKinsey and Company, 2002
Operate
Trade/ destroy
CreateMore time
More time
Less time
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Growth as a Strategic Imperative
Wayne Calloway, PepsiCo
(Gertz & Baptista)
No company ever shrank to greatness
Our shareholders want profit
improvement very soon. In the short
term, the only solution is to get rid
of people and assets.”
Fortune 1000 CEO
Every dim-witted idea I see is now dressed
up as a growth initiative.”
Fortune 500 CEOYou can’t save your way to prosperity”
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Some Myths of Growth
1. Growth is common (compound growth for F500 1983-1993, adjusted for inflation, was -.33%)
2. Big companies can’t grow (virtually no correlation between firm size and growth rate)
3. We’re in a “dead industry” (some companies in dead industries have recorded double-digit growth rates)• “If it’s a choice between investing in a good company in a great
industry, or a great company in a lousy industry, I’ll take the great company in the lousy industry any day …It’s the company, stupid.” Peter Lynch
4. Most large company growth is created through acquisition (Nucor, MBNA internal growth; Traveler’s was a sum of a series of acquisitions)
5. Cost cutting sets the stage for growth (only 7% of profitable growers were cost cutters in prior period)
Source: Jeff Dyer, Brigham Young University, 2001
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Alternative Modes of Growth
Internal•Geographic
•Related product
•New opportunities
•Proliferation
•Extension
•New venture
Alliances
•Vertical
•Horizontal
•Non-equity
•Equity
•JV
Acquisition•Vertical
•Horizontal
•Diversification
•Partial
•Takeover
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Short-term Growth
• New businesses suffocate in shadow of legacy ones
• New businesses thrive while traditional businesses languish
• Roadblocks on previously successful growth paths
Common Complaints • Genetic evolution– Traditional businesses (and people) are combined with
new approaches– New businesses refresh traditional ones– Traditional businesses are occasionally re-combined– Multiple growth paths are traveled– Existing businesses are culled
• Old AND new
Solution
• Diversified into high-volume, low-cost, in-store banking outlets with service-training of sales force from theme park companies
• Newly trained salesforce re-vitalized traditional branch network
• Lexus entry into luxury market, built on– Discarded, experimental, midsize, Asian market product platform– New dealerships, brand images, styling, technology– Rearchitected selected engineering features
• Refreshed lower priced name plates with Lexus technology
• Sophisticated combination of mutations, recombinations, and refreshers
• Combined camera skills (optics technology, management of dealers, high-volume assembly) with new copier product
• Combined print engines from copiers with new laser printer product and OEM channel into print engine business
• Refreshed copier business with sophisticated control technology from laser printers
• Recombined dealer management, high-volume assembly, copier and laser printer technology to launch fax machines business
Source: Adapted from Kathy Eisenhardt, Stanford, 2002
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• Strategic plans are created, then ignored• Strategic plans are wrong• Short-term performance takes priority over future thinking
Long-term Growth Common Complaints
• Probe the future– Wide-variety of low-cost probes
• Manage NUMBER of probes, not just type. More probes, more variety with more uncertainty• Create identity of company, not vision of industry• 15 month intuition, 5 month plan, 5 week schedule
• “You’ve got to experiment…strategy is about buying options…then picking the best ones” – John Browne, CEO
• Drilling experiments on Andrew oil field led to revolutionary horizontal drilling technique
• Limited JV with Safeway to experiment with integrated food and fuel convenience stores
• “You’ve got to make sure you have feelers out to see when things are about to achieve critical mass” - Bill Gates, COB
• Small investments in 3 video compression technologies • Both internal projects and “Blue Sky” projects
• Organic experiments w/futures trading, Market Buzz, AdvisorSource• Alliances w/Goldman Sachs for IPOs, Great West Life for direct life
insurance• In-house futurists
Solution
Source: Adapted from Kathy Eisenhardt, Stanford, 2002
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Overview of Strategy
Definition and Brief History of Strategy Industry Strategy Firm Strategy Business Unit Strategy Current Trends in Strategy
Business Building Growth Short-term and Long-term
Conclusion
43
The Synthesis of Strategy
FirmFirmBusiness
UnitBusiness
UnitIndustryIndustry
Strategic Advantage
Choose your sandbox
Business Definition
Firm Resources
Which business units?
Business unit boundaries
Managing cross business synergies
“Strategy is about being different. It means deliberately choosing a different set of activities to deliver a unique mix of value”
Hamel and Prahalad
Merriam Webster dictionary
the science and art of military command exercised to meet the enemy in combat under advantageous conditions
Resource-based view Where does competitive advantage come from? The use of valuable, rare, non-substitutable, and appropriable resources
and capabilities to create monopoly or rents
Michael Porter
Leverage of core competence to achieve competitive innovation (changing the rules of the game)
New Business Model
Downsizing
Network Organizations
Knowledge-based Competition
Country capabilities
Globalization
Re-engineering
Time-base Competition
Core Competencies
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Key Debates in Strategy
Strategy Formulation vs. Strategy Implementation
Can you create sustainable competitive advantage?
Which is most valuable-physical assets or intangibles
Where is the most value created?
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Conclusion: Elements of a Good Strategy
A good strategy includes:
•Customer Needs•Competitive Position•Resources and Capabilities Underlying Strategy•Internal/external Constraints•Levels of Uncertainty
Understanding and Analysis of:
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Strategy and Execution
Strategy
Execution
Doomed to Fail
A Botched Job
Flirting with Disaster
A Good Chance forSuccess
Weak Strong
Weak
Strong
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Leadership Tasks…
Develop Exclusive legal franchises; Patents; Channel Crowding; Causal ambiguity; Learning curve; Buyer
switching costs; Reputation
Recognize the added value of each resource and applying the proper resource in the appropriate way at
the appropriate time.
Recognize which resources will be valuable in the future and building those resources now. Preserving
existing resources.
Source: David Besanko and Anne Gron “Notes on the Resource-based view of the Firm 2000. Kellogg School of Management
Managing Resources
Protecting Resources
Allocating Resources
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The Need for Leadership
"There is nothing which rots morale more quickly and more completely than . . . the feeling that those in authority do not know their own minds."
Lionel Urwick
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Framework for Organizational Diagnosis
1 Vision
2 Strategy
3 Structure4
Decision Support Systems
5Reward Systems
6Human Resource
Systems7
Organization Culture
PERFORMANCESource: Robert Duncan, 1999
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Framework for Organizational Diagnosis
1 Vision
2 Strategy
3 Structure4
Decision Support Systems
5Reward Systems
6Human Resource
Systems
7Organization Culture
PERFORMANCESource: Robert Duncan, 1999