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Chapter 1 Introducing Strategic Management
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Chapter 1Introducing Strategic Management

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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

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A TALE OF TWO STORES

1891

1970

1990 20051924

Sears launches catalog business

Takes control of production and distribution

Moves into on-premise retailing/General Robert Wood takes over

1960

Rapid growth, driven by end-based locations and company-controlled factories

Experts believe Sears way was the only way to compete “The paragon of retailers”

20001980

Expands into banking, investments, real estate services, and insurance

Financial trouble; sells off all non-retail businesses

Acquired by KMart

1970

Sam Walton opens first Wal-Mart with focus on low-prices

30 stores located in “one-horse towns which everybody else was ignoring”; Sam Walton

1962 20001980

Dizzying growth

Invests $500 million in inventory management technology

Perfects model; grows; expands into new markets (international) and store concepts (Sam’s clubs)

A Firm’s per-formance is directly related to the quality of its strategy and its compe-tency in im-plementing it

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TWO RETAILERS AT A GLANCE

Sears Wal-Mart

Year founded 1891 1962

Stores 1980Stores 2004

8642026

6005289

Revenues 1980Revenues 2004

$25,194 million$36,100 million

$1,643 million$285,222 million

Net profits 1980Net profits 2004

606M (2.4% return on sales)507M (-1.4% return on sales)

$55 M(3.3% return on sales)$10,267 M (3.6% return on sales)

Market capitalization 1980Market capitalization 2004

USD 4.8 billionUSD 12.2 billion

USD 1 billionUSD 200.2 billion

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A TALE OF TWO RETAILERS – PERFORMANCE MEASURES

USD millions

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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

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STRATEGY

General

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

vehicles)

Strategos: “the general’s view”

Holistic “big picture”

Tactical details

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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

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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

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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

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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

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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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PROFITABILITY AND MARKET VALUATION OF US AIRLINE INDUSTRY

Profitability

Market valuation

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JET BLUE STRATEGY

Objective

To “bring humanity back to air travel”

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

VehiclesVehicles• Start from scratch and achieve all growth

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

DifferentiatorsDifferentiators• High level of service compared to low fare competitors

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

StrategyStrategy• Grow from one route between two cities to serving 20

cities in just 3 years

Economic logicEconomic 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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IMPLEMENTATION LEVERS

DescriptionImplementation

levers

Structure is the manner in which responsibilities, tasks, and people are organized. It includes the organization’s authority structure, hierarchy, units, divisions, and coordinating mechanisms

Organizationalstructure

Systems are all the organizational processes and procedures usedin daily operations. These include control and incentive systems, resource‑allocation procedures, information systems, budgeting,and distribution

Systems andprocesses

The people and rewards lever points to the importance of using all organization members to implement a strategy. Competitive advantage is generally tied to your human resources. Successful implementation depends on having the right people and then developing and training them in ways that support the firm’s strategy. In addition, rewards – how you pay your people – can accelerate the implementation of your strategy or undermine it

People andrewards

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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?

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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

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SUMMARY

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

1

Understand the relationship between strategy formulationand implementation

2

Describe the determinants of competitive advantage3

Recognize the difference between a fundamental and a dynamic competitive advantage

4

Understand why we study strategic management5

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REVIEW QUESTIONS

?• What is strategic management?

• What are the key components of the strategic management process?

• How does business strategy differ from corporate strategy?

• What is the relationship between strategy formulation and strategy implementation?

• What are the five elements of the strategy-formulation – diamond model?

• What are the internal and external perspectives on competitive advantage?

• What are the fundamental and dynamic perspectives on competitive advantage?

• Why should you study strategic management?

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GROUP ACTIVITY

Identify the characteristics of a firm at which group members would like to work.

Then select an example of a firm that fits your description.

What is the difference between business and corporate strategy at this firm?

How could this difference affect the experiences and opportunities that you might gain by working for this firm?

Finally, taking advantage of your insight into the firm’s strategy, construct a high-impact job-application cover letter.

Identify the characteristics of a firm at which group members would like to work.

Then select an example of a firm that fits your description.

What is the difference between business and corporate strategy at this firm?

How could this difference affect the experiences and opportunities that you might gain by working for this firm?

Finally, taking advantage of your insight into the firm’s strategy, construct a high-impact job-application cover letter.

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Identify a firm that may be thinking of expanding into new international markets.

Apply the staging element of the strategy diamond to the firm’s expansion opportunities or plans.

Which markets should it target first and why?

How will international expansion be related to the firm’s business and corporate strategies?

GROUP ACTIVITY