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Introduction

Stern School at New York University


Strategy Core
J.P. Eggers
Agenda for Session 1
Introduce the subject of strategy
Introduce this course (and a little about me)
Talk about Performance Indicator & golf balls
Discuss value creation & capture perspective
But first!
A LITTLE INTERACTION
Contestants are appointed CEOs of
average firms in different industries
Each quarter the CEO with the lowest
profitability is fired
Pilot: 3 contestants VOLUNTEERS?
Pilot industry lineup
Average firm in the following industries
U.S. airline carriers
i.e. Southwest, US Airways, JetBlue
U.S. pharmaceuticals
i.e. Johnson & Johnson, Eli Lilly, Pfizer
U.S. personal computers and peripherals
i.e. Dell, Apple, Hewlett-Packard
Variation in performance across industries
Average economic profits of U.S. industries (ROE/cost of capital spread)
Reproduced from Ghemawat (2004), Strategy and the Business Landscape
Avg. Spread
(1984-2002)
Avg. Equity ($B) (1984-2002)
(20%)
(10%)
0%
10%
20%
30%
40%
0 200 400 600 800 1,000 1,200 1,400 1,600 1,800 2,000
Tele Service
Semiconduct
Air Transport
Textile
Steel
Railroad
Paper & For.
For El/Ent.
For Telecom
Power
Entertain
Toiletry & Cosmetic
Soft Drinks
Pharmaceutical
Med Supplies
Computer Software
Tobacco
Publishing
Financial Services
Bank
Retail Store
Petro-Integergrated
Aerospace/
Defense
Computers & Peripherals
Auto Parts
Building Materials
Insurance Property & Casualty
Auto & Truck
Avg. Spread
(1984-2002)
Avg. Equity ($B) (1984-2002)
(20%)
(10%)
0%
10%
20%
30%
40%
0 200 400 600 800 1,000 1,200 1,400 1,600 1,800 2,000
Tele Service
Semiconduct
Air Transport
Textile
Steel
Railroad
Paper & For.
For El/Ent.
For Telecom
Power
Entertain
Toiletry & Cosmetic
Soft Drinks
Pharmaceutical
Med Supplies
Computer Software
Tobacco
Publishing
Financial Services
Bank
Retail Store
Petro-Integergrated
Aerospace/
Defense
Computers & Peripherals
Auto Parts
Building Materials
Insurance Property & Casualty
Auto & Truck
Variation in profitability across three industries
N
e
t

P
r
o
f
i
t

M
a
r
g
i
n

i
n

2
0
0
9

13.6%
8.8%
-3.1%
Pharma Computers Airlines
Lets try again!
Different format for reality TV show
Average CEO by Market Position within Industry?
Competing CEOs in a Particular Market Position?
All pharmaceuticals!
Proprietary drug manufacturers
i.e. Eli Lilly, Pfizer
Generic drug manufacturers
i.e. Teva, Ivax
Biotech firms
i.e. Amgen, Biogen
Variation in Performance within Industries:
Market Position

W
e
i
g
h
t
e
d

N
e
t

P
r
o
f
i
t

M
a
r
g
i
n

i
n

2
0
0
9

All
Pharma
Proprietary Generic Biotech
13.6%
16.4%
-0.4% 0.4%
Variation in Performance within Market Position:
Proprietary Manufacturers
N
e
t

P
r
o
f
i
t

M
a
r
g
i
n

i
n

2
0
0
9

Glaxo Eli Lilly Pfizer Bristol-Myers
19.8%
16.9%
24.8%
17.6%
Some Firms Seem to Have an Enduring Advantage
Firms Achieving 20 or More Years of Persistent Superior Performance
(ROA significantly above industry average), 1974-1997
Pharma: American Home Products, Lilly
Publishing: Plenum
Computing: Hewlett Packard
Medical Instr. Stryker
Trucking: UPS
Paper and Board: 3M
Grocery: Albertsons, Brunos, Winn Dixie, Weis, Publix
Restaurants: Bob Evans, Lubys, McDonalds, Ruby Tuesday
Firms Achieving 50 Years of Persistent Superior
Performance:
American Home Products, Lilly, 3M
adapted from Wiggins and Ruefli, Organization Science, 2002.
from McGahan & Porter, Strategic Mgmt Journal, 1997
So, what really matters, and how much?
4%
32%
2%
19%
43%
Business Unit
Year
Corporate Parent
Industry
Unexplained
Variation
Drivers of variation in firm profits (ROA) over time (1981-1994)
Industry?
Business Unit?
Something else important?
Now we know that there are significant differences
between firms (both at any moment and over time).

But, what is the X Factor, that secret ingredient that
makes one firm more successful than another in the
same business?
Is it luck?
Is it a brilliant idea?
Is it hard work?
Is it good people working together?
We will admit to the possibility of all of these things
The Elements of Strategy?
There are many definitions of strategy, but here are a good one-
and-a-half:
Strategy is 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, Strategy and Structure
Strategy is the ! plan that integrates an organizations major goals.
James Brian Quinn, Strategies for Change
The goal of strategy is sustainable competitive advantage:
Firms to do well when they continue to create value and continue to
attract participants, even when other firms are making efforts to attract
the same participants. Well call this a firms sustainable competitive
advantage.
Course Overview
Stern School at New York University
Strategy Core
J.P. Eggers
Motivation for this class
This course is motivated by a simple question:

What allows certain firms in certain industries to earn positive
economic profits while others deliver negative returns?

We will investigate five types of answers:
Structural answer the external environment
Organizational answer the activities and resources of the firm
Scope answer the vertical and horizontal boundaries of the firm
Growth answer the ways in which the firm grows over time
Managerial answer decision-making
Things to know about strategy
Namely, that is very messy
No single answer
Context-specific
Firm-specific
No single framework
Multiple tools to consider
Lots of overlap
Our goals here are:
Build a toolkit of frameworks, tools, and perspectives
Help you understand when some tools work better than others
Help you understand the limitations of these tools
Build strategic thinking perspective on business problems
Learning components
Readings
Normally 0-2 readings per 3 hour class block
Posted on NYU Classes (some in coursepack)
Video lectures
Developing a series of short (15-25 minute) video lectures that replace some
readings and some in-class lectures
Ensures that we have more time for discussion
Some will help to wrap the previous week, some will lead into the coming
week
Lecturettes
Some remaining short (<30 minute) content-driven sessions, each covering
a specific topic
Slides will be available on NYU Classes before class (though censored in
some cases)
Cases
Primary learning mechanism
Effectively one case per 3 hour class block
Case preparation
Things to do:
Read the case closely
Read it again
Sketch out short answers to study questions on syllabus
Be creative, but try to work with concepts from readings
Things NOT to do:
Look for outside information deal with the cases as they are presented
Rely on former students honor code violation, limits learning, disrupts
the class, annoys me, etc.
Think there is only one right answer or that there are no wrong
answers
Grading
Course grading is based on the following:
Participation, attendance, in-class activities 25%
Small group short assignments 20%
Group project I 15%
Group project II 15%
Individual final assignment 25%
Current events assignments
Once per semester, each group will be responsible for one 15
minute class segment
Build a short (1-3 slides, ~5 minutes) presentation based on a
current news article related to strategy:
Describe the company
Describe the specific event/issue
Identify relevance to strategy
End with a question to prompt discussion
Then lead a ~10 minute discussion on the topic
None this week (Session 1), but from there they are ordered by your
group number (so Group 1 goes in Session 2)
Free market feel free to trade if you can find a partner group & make a
deal
Other expectations
No open laptops in class, except during group exercise or breaks
No cell phones, smart phones, iPhones, etc.
We will take 10 minute breaks during each session
Stay in the same general space for the first few weeks, and bring
your name cards
Office hours: Wednesdays, 10-12, or by appointment
Email (jeggers@stern.nyu.edu) is best way to get me
Office is Tisch 715
Obligatory little bit about me!
Education:
BA, Amherst College (History)
MBA, Emory University (Strategy)
PhD, Wharton / UPenn (Strategy)
Work experience
Pre-MBA spent 4 years in political consulting
MBA internship at J&J (ETHICON) in New Brunswick
Post-MBA spent 4 years in strategy consulting
Kurt Salmon Associates (retail and consumer products)
Viant Inc. (defunct .com consulting)
Clients: Levis, Nordstrom, Brooks Brothers, YKK, Coca-Cola, NASCAR,
Turner Broadcasting, Burger King
Obligatory little bit about me!
Research interests
Strategy, specifically technology strategy and managerial decision-
making
Work on how managers deal with the uncertainty posed by new
technologies
Example: Implications for firms that speculate on a new technology, but
that technology fails to be a success what do these firms do?
Finding me
Tisch 715, Wed 10-12
jeggers@stern.nyu.edu
@jpeggers
www.linkedin.com/in/jpeggers/
Four types of golf balls
Damage to golf balls
Water and golf balls
Takes 12 hours to penetrate the core
Unauthorized refinishing
Adds layer of coating that affects dimple size &
shape
Has implications for aerodynamics

Unauthorized refurbishing
Coating sandblasted off, then a new coating is
reapplied totally different from original purpose
of the ball
Sources of support
Chemistry and engineering professors at leading universities
Past president of the PGA of America
Multiple media outlets
Why has PI found it so hard to get golf ball
manufacturers to adopt its own technology?
Commercializing this innovation looks like an easy
putt with the green funneling down towards the cup.
But it has proved to be a par 10 hole.
Why?
Value Based Perspective
(Creation & Capture)
Stern School at New York University
Strategy Core
J.P. Eggers
vALuL C8LA1lCn Anu CA1u8L
The Value Creation and Capture framework links profit
outcomes to strategic decisions firms make
unlLs sold
$/unlL
8eneL of producL
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wllllngness-Lo-pay
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C
unlLs sold, or number of
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Average (per unlL)
cosL of producuon
C
vALuL C8LA1lCn Anu CA1u8L
The Value Creation and Capture framework links profit
outcomes to strategic decisions firms make
unlLs sold
$/unlL
8eneL of producL
Lo cusLomer,
wllllngness-Lo-pay
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unlLs sold, or number of
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Value created
vALuL C8LA1lCn Anu CA1u8L
The Value Creation and Capture framework links profit
outcomes to strategic decisions firms make
unlLs sold
$/unlL
8eneL of producL
Lo cusLomer,
wllllngness-Lo-pay
W1
C
unlLs sold, or number of
cusLomers who purchase
Average (per unlL)
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C
Value created
rlce cusLomer pays
for producL
ln Lhe markeL
P
value LhaL goes Lo
cusLomers as
CCnSuML8 Su8LuS
value LhaL goes Lo rms as
8Cll1S
In the news
- ChlpoLle nds soluuon Lo grow pay lncrease for LomaLo plckers"
- ChlpoLle hlghllghLs food phllosophy ln new ads"
- Cuesuon:
- Pow does ChlpoLle's commlLmenL Lo pay LomaLo growers an
addluonal penny a pound aecL value creauon & capLure?
An example of Value Creation and Capture:
Florida tomato growers, fast food, and fair food
- larm worker alllance promoung falr food" labor pracuces
- Pas been worklng Lo geL 1aco 8ell, Mcuonald's, 8urger klng, and
oLhers Lo agree Lo a penny-per-pound" ralse for LomaLo plckers
- Would be lmplemenLed as a surcharge LhaL growers would pass
dlrecLly Lo plckers
CCALl1lCn Cl lMMCkALLL WC8kL8S
1CMA1C lCkL8S
- Larn 30 cenLs per 32-pound buckeL of LomaLoes plcked
($10,000 - 12,000 per year)
- 8aLe has rlsen only 3 cenLs per buckeL slnce 1980
- 8epresenLs 90 of llorlda LomaLo growers (ma[or source of wlnLer LomaLoes ln u.S.)
- Cpposes penny-per-pound" lncrease
- Pas LhreaLened lLs growers wlLh $100,000 ne lf Lhey pay surcharge
lLC8luA 1CMA1C C8CWL8S LxCPAnCL
An example of Value Creation and Capture, continued:
Chipotle and East Coast Growers and Packers
An AC8LLMLn1
- ln SepLember 2009, ChlpoLle Mexlcan Crlll and LasL CoasL Crowers made a
sourclng agreemenL lncorporaung Lhe penny-per-pound" surcharge
- ChlpoLle already has a pollcy of uslng naLurally ralsed meaLs and organlc and
local produce
- LasL CosL Crowers wlLhdrew from Lhe llorlda 1omaLo Crowers Lxchange
Pow wlll Lhls aecL ChlpoLle's value creauon and
capLure?
vALuL C8LA1lCn Anu CA1u8L
How does Chipotles value creation and capture
change with the use of fair food tomatoes?
unlLs sold
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8eneL of producL
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wllllngness-Lo-pay
W1
C
unlLs sold, or number of
cusLomers who purchase
Average (per unlL)
cosL of producuon
C
rlce cusLomer pays
for producL
ln Lhe markeL
P
value LhaL goes Lo
cusLomers as
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value LhaL goes Lo rms as
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vALuL C8LA1lCn Anu CA1u8L
Will the use of fair food tomatoes increase Chipotles
profits?
unlLs sold
$/unlL
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C
P
Consumer surplus
roLs
unlLs sold
$/unlL
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C
P
Consumer surplus
roLs
vALuL C8LA1lCn Anu CA1u8L
Will the use of fair food tomatoes increase Chipotles
profits?
unlLs sold
$/unlL
C
P
Consumer surplus
roLs
unlLs sold
$/unlL
C
P
Consumer surplus
roLs
W1
W1
vALuL C8LA1lCn Anu CA1u8L
Will the use of fair food tomatoes increase Chipotles
profits?
unlLs sold
$/unlL
C
P
Consumer surplus
roLs
unlLs sold
$/unlL
C
P
Consumer surplus
roLs
W1
W1
vALuL C8LA1lCn Anu CA1u8L
Will the use of fair food tomatoes increase Chipotles
profits?
unlLs sold
$/unlL
C
P
Consumer surplus
roLs
unlLs sold
$/unlL
C
P
Consumer surplus
roLs
CosLs go up a loL, beneLs only a llule
ulmculL Lo lncrease prlce and proLs

W1
W1
vALuL C8LA1lCn Anu CA1u8L
Will the use of fair food tomatoes increase Chipotles
profits?
unlLs sold
$/unlL
C
P
Consumer surplus
roLs
unlLs sold
$/unlL
C
P
Consumer surplus
roLs
CosLs go up a loL, beneLs only a llule
ulmculL Lo lncrease prlce and proLs

W1
W1
vALuL C8LA1lCn Anu CA1u8L
Will the use of fair food tomatoes increase Chipotles
profits?
unlLs sold
$/unlL
C
P
Consumer surplus
roLs
unlLs sold
$/unlL
C
P
Consumer surplus
roLs
CosLs go up a loL, beneLs only a llule
ulmculL Lo lncrease prlce and proLs

W1
W1
vALuL C8LA1lCn Anu CA1u8L
Will the use of fair food tomatoes increase Chipotles
profits?
unlLs sold
$/unlL
C
P
Consumer surplus
roLs
unlLs sold
$/unlL
C
P
Consumer surplus
roLs
CosLs go up a loL, beneLs only a llule
ulmculL Lo lncrease prlce and proLs

CosLs go up a llule, beneLs a loL
Lasler Lo lncrease prlce and proLs

W1
W1
Wrap-Up
Stern School at New York University
Strategy Core
J.P. Eggers
Update
Performance Indicator has still not been able to get golf ball makers
to use its technology
Is trying to market its technology to different industries, including
permanent yet reversible tattoo ink, paint for airport runways, cross
walks, and medical devices
General lessons from
Performance Indicator
Spillover problems can create a disincentive to invest, even if it creates value
for the firm itself
Coordination challenges where firms need to move together to create the
most value are difficult to count on for adopting a new innovation
Innovations that simply redistribute value instead of creating new value
are typically much harder to get adopted
Value creation is not the same as value capture. Without a good way to do the
latter, you cant make money
A customer-by-customer analysis can be very powerful. Put yourself in the
customers shoes, since they adopt on their own and not with others
Beware the dangers of the false analogy! (How is a golf ball not like a
toothbrush?!?!)
lor a sLraLegy Lo be proLable lL musL
lncrease prlce, or
decrease average cosL, or
lncrease quanuLy sold
The overarching question for strategy: How can firms
make & sustain profits in the long run?
= - x CuanuLy Average cosL ) ( rlce
)
(
x unlL sales
CosL
per unlL
8evenue
per unlL
- =
roL CosL 8evenue - =
vALuL C8LA1lCn Anu CA1u8L
The Value Creation and Capture framework links profit
outcomes to strategic decisions firms make
unlLs sold
$/unlL
8eneL of producL
Lo cusLomer,
wllllngness-Lo-pay
W1
C
unlLs sold, or number of
cusLomers who purchase
Average (per unlL)
cosL of producuon
C
Value created
rlce cusLomer pays
for producL
ln Lhe markeL
P
value LhaL goes Lo
cusLomers as
CCnSuML8 Su8LuS
value LhaL goes Lo rms as
8Cll1S
Value-based approach takeaways
In order to be successful, strategies have to affect one or both of the
following:
Drive up willingness to pay (WTP)
May increase price
May increase sales volume
Drive down costs
This gap is the wedge that firms try to drive
Strategies also need to take into account value capture
How does the firm capture the benefits of its strategies, typically in
terms of price
Well discuss this in more detail in the coming sessions
Coming up next!
(Group Project I information in a moment)
Session 2
CASE: Apple Computers in 2006
READ: Porter, Five Forces (Classes)
VIDEO: Value Creation & Value Capture (Classes)
ASSIGNMENT: Small group (2-3 students)
Use Porters Five Forces to analyze the personal computer industry in the
mid-1980s based on information in the case. One page (single spaced, on
side) max write up to be turned in at the start of Session 2
Current events for Group 1
Lunches (sign-up schedule pending, 100% optional)
Block leaders (if already elected) see me for 2 seconds after class
Industry, Positioning & Resources Group Assignment
Assignment: As a team, select one leading firm (or SBU) in a single
industry. Can be product-based or service-based. Ones you know
are OK (or even advised). Use other online resources.
Note: Industries on which we focus in class (case or discussion) are
generally bad ideas for project topics. If you are at all uncertain
whether your choice may qualify, please contact me.
Deliverable: Prepare <=7 slides (as written memo) with
Basic info on the chosen company, including identification and
assessment of their strategy and how it creates & captures value
Strategic group map with 3+ other competitors
Discussion of four important activities and/or resources that the firm
uses to support its strategy
Discussion of ability of one such activity/resource to provide sustainable
competitive advantage
2+ key takeaways (i.e. What did I learn from doing this analysis?)
Due: Deposit on Blackboard before start of Session 7
Some ideas on resources for information
NYU Virtual Business Library
http://library.nyu.edu/vbl/
Under Company and Financial Information
D&B Million Dollar DBase and Hoovers Online have basic information
Factiva provides ability to search news stories
Investext and ValueLine provide analyst reports on companies, industries
Mergent Online provides info on products, partners, etc.
Datamonitor Reports (available via EBSCO Business Source Premier) provide detailed
data and analysis on a limited set of companies
Other resources:
Company websites (mission statements, organization structure, etc.)
Newspaper reports (often find one with detailed, inside access
NOTE: I dont expect real citations, but I want to be able to tell what YOU
came up with, versus what you borrowed from somewhere (with a note on
where it came from)