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ani#ated fil# )$141.8 #illion+. The Lion King ca#e o(t in 1994 and has had bo4 office sales of o&er $7"8.1 #illion and has sold o&er 7 #illion copies in the ho#e &ideo #arket. 9ll three of these ani#ated fil#s did e4tre#ely well at the bo4 office, the &ideo store, and the toy store. In ti#e, Eisner also di&ersified the fir#s portfolio e4tensi&ely. Disney bo(ght 9$0 tele&ision, which incl(ded E%5<, hotels, professional sports tea#s )9nahei# 9ngels and the *ighty D(cks+, a cr(ise ship, and de&eloped a chain of retail stores. =icensing of Disney characters, old and new, was aggressi&ely e4panded. In the early 199 s Disney characters were a co##on, and highly pri6ed, toy incl(ded in kids #eals at fast food resta(rants and as pri6es in breakfast cereals bo4es. >ro# 1984 to 1994, Disneys #arket capitali6ation increased fro# $" billion to $"8 billion. <ow thats strategy? 'he Disney story is not so stellar d(ring the second half of Eisners " year reign at Disney. Eisner has done battle with disenchanted board #e#bers and e4ec(ti&es, #ost notably, .oy Disney who coincidentally was instr(#ental in hiring Eisner in 1984. Earnings per share peaked in 199/ at $ .91 and dipped to $@ . " in " 1. 0ritics contend that the reason for the decline in perfor#ance is that Eisner has p(shed o(t e4ec(ti&es and board #e#bers that pro&ided checks and balances to his power. Disneys failed relationship with 5i4ar is often cited as a contrib(ting factor to Disneys woes. ,ther reasons for the decline were clearly o(tside Eisners control. 'he terrorist attacks of %ept. 11, " 1, kept people away fro# the#e parks, especially foreign &isitors. 9fter Eisners depart(re in late " 1, $ob Iger took o&er. Ander Iger, Disneys re&en(es and net inco#e rose in the " !@" 8 period. )3(ey B *cCowan, >ort(ne 4D1/D1991, 171)/+E 44@11F -essel, ,rlando %entinel, *arch 11, " 4F Gahoo >inance accessed on ,ctober 1!, " 9+.
DEFINING STRATEGY
%trategy is a fir#s theory abo(t how to gain co#petiti&e ad&antage. -hile #any other definitions of strategy refer to a plan or a set of coordinated actions, we take the definition back to the theoretical le&el that wo(ld infl(ence the creation of any s(ch plan or set of actions. Hohnson and %choles define strategy as followsE I%trategy is the direction and scope of an organi6ation o&er the long-term: which achie&es advantage for the organi6ation thro(gh its config(ration of resources within a challenging environment, to #eet the needs of markets and to f(lfill stakeholder e4pectationsI. In other words, strategy is abo(tE -here is the b(siness trying to get to in the long@ter# )direction) -hich #arkets sho(ld a b(siness co#pete in and what kind of acti&ities is in&ol&ed in s(ch #arketsJ )marketsF scope+
3ow can the b(siness perfor# better than the co#petition in those #arketsJ )advantage+J -hat reso(rces )skills, assets, finance, relationships, technical co#petence, facilities+ are re8(ired in order to be able to co#peteJ )resources+J -hat e4ternal, en&iron#ental factors affect the b(sinessesK ability to co#peteJ )environment+J -hat are the &al(es and e4pectations of those who ha&e power in and aro(nd the b(sinessJ )stakeholders). Strategy at Different Levels of a Business %trategies e4ist at se&eral le&els in any organisation @ ranging fro# the o&erall b(siness )or gro(p of b(sinesses+ thro(gh to indi&id(als working in it. Corporate Strategy @ is concerned with the o&erall p(rpose and scope of the b(siness to #eet stakeholder e4pectations. 'his is a cr(cial le&el since it is hea&ily infl(enced by in&estors in the b(siness and acts to g(ide strategic decision@#aking thro(gho(t the b(siness. 0orporate strategy is often stated e4plicitly in a I#ission state#entI. Business nit Strategy @ is concerned #ore with how a b(siness co#petes s(ccessf(lly in a partic(lar #arket. It concerns strategic decisions abo(t choice of prod(cts, #eeting needs of c(sto#ers, gaining ad&antage o&er co#petitors, e4ploiting or creating new opport(nities etc. !perational Strategy @ is concerned with how each part of the b(siness is organised to deli&er the corporate and b(siness@(nit le&el strategic direction. ,perational strategy therefore foc(ses on iss(es of reso(rces, processes, people etc.
Strategic Analysis 'his is all abo(t the analysing the strength of b(sinessesK position and (nderstanding the i#portant e4ternal factors that #ay infl(ence that position. 'he process of %trategic 9nalysis can be assisted by a n(#ber of tools, incl(dingE "ES# $nalysis @ a techni8(e for (nderstanding the Ien&iron#entI in which a b(siness operates Scenario "lanning @ a techni8(e that b(ilds &ario(s pla(sible &iews of possible f(t(res for a b(siness %ive %orces $nalysis @ a techni8(e for identifying the forces which affect the le&el of co#petition in an ind(stry &arket Segmentation @ a techni8(e which seeks to identify si#ilarities and differences between gro(ps of c(sto#ers or (sers Directional "olicy &atrix @ a techni8(e which s(##ari6es the co#petiti&e strength of a b(sinessKs operations in specific #arkets Competitor $nalysis @ a wide range of techni8(es and analysis that seeks to s(##ari6e a b(sinessesK o&erall co#petiti&e position Critical Success %actor $nalysis @ a techni8(e to identify those areas in which a b(siness #(st o(tperfor# the co#petition in order to s(cceed S'!# $nalysis @ a (sef(l s(##ary techni8(e for s(##ari6ing the key iss(es arising fro# an assess#ent of a b(sinessKs IinternalI position and Ie4ternalI en&iron#ental infl(ences. Strategic Choice %trategic choice is the point in the process where #anagers choose how to organi6e and position the reso(rces of the fir#. E#phasi6e the following pointsE L #eaningf(l strategic choices can be #ade only when #anagers (nderstand the e4ternal and internal en&iron#ents they face
L L
strategic choices are #ade at two le&elsE the b(siness le&el and the corporate le&el b(siness le&el strategic choices deal with the positioning of a gi&en b(siness a b(siness #ay be positioned at the top of the #arket:high 8(ality, high price, it #ay be positioned at the lower end of the #arket:low 8(ality, low price, or it #ay be positioned so#ewhere in between these e4tre#es corporate le&el strategic choices deter#ine in which b(sinesses a fir# will operate
Strategy Implementation 'he i#ple#entation ele#ent of the strategic #anage#ent process is, M(st as the na#e i#plies, concerned with how #anagers carry o(t the strategic choices they #ake. Emphasize that: L ,rgani6ational str(ct(re and control are the broad categories of i#ple#entation iss(es that are typically considered in the strategic #anage#ent process. L 3iring, pro#otion, co#pensation, and disciplinary policies are all iss(es that wo(ld need to be addressed as a fir# engages in the strategic #anage#ent process. L Different strategic choices call for different i#ple#entation approaches
Company" #okia (ision: I0onnecting 5eople. ,(r goal is to b(ild great #obile prod(cts that enable billions of people worldwide to enMoy #ore of what life has to offer. ,(r challenge is to achie&e this in an increasingly dyna#ic and co#petiti&e en&iron#ent. Ideas. Energy. E4cite#ent. ,pport(nities. In todayKs #obile world, it feels like anything is possible@and thatKs what inspires (s to get o(t of bed e&ery day.I &ission: I$(ild a new winning #obile ecosyste# in partnership with *icrosoft. $ring the ne4t billion online in de&eloping growth #arket. In&est in ne4t@generation disr(pti&e technologies. increase o(r foc(s on speed, res(lts and acco(ntabilityI
$%&ectives ,bMecti&es nat(rally flow fro# the #ission or raison detre of fir#s. ,bMecti&es are specific, #eas(rable targets that a fir# needs to reach in order to carry o(t its #ission. Emphasize that: L the #ission and obMecti&es of a fir# sho(ld ser&e as the basis or backgro(nd for the strategic #anage#ent process L a fir#s #ission and obMecti&es sho(ld infor# the analysis done in e&ery other seg#ent of the #odel L st(dents sho(ld incl(de a disc(ssion of a fir#s #ission and obMecti&es in case analyses and in their written work to help ens(re that they do not arri&e at s(ggestions that are in conflict with the fir#s #ission and obMecti&es
"ompetitive #dvantage
0o#petiti&e ad&antage is the desired end state of the strategic #anage#ent process. Each of the other seg#ents of the strategic #anage#ent process is (ndertaken with the ai# of achie&ing co#petiti&e ad&antage. Example: 9ny co#petiti&e ad&antage that %teelcon #ay enMoy will co#e fro# ha&ing analy6ed the e4ternal en&iron#ent and the internal en&iron#ent to infor# strategic choices, which will need to be i#ple#ented appropriately. If all this is done in a way that is consistent with the #ission of %teelcon, it can reasonably e4pect to achie&e co#petiti&e ad&antage. Defining Competitive Advantage 0o#petiti&e ad&antage is the ability to create #ore econo#ic &al(e than co#petitors. E4plain and elaborate on the followingE
L L
L L
co#petiti&e ad&antage #eans that there is so#ething abo(t a fir#s offering to the #arket that allows the fir# to reali6e greater econo#ic &al(e than co#petitors )3arley@Da&idson *otorcycles+ that difference in econo#ic &al(e co(ld co#e abo(t in se&eral different ways L it co(ld be that the prod(ct offered or the way it is offered ca(ses people to prefer it to the point that they are willing to pay a higher price for the prod(ct )<ordstro#+ L it co(ld be that the fir# has fig(red o(t a way to prod(ce and distrib(te the prod(ct at a lo'er cost than co#petitors )-al@*art+ a fir#s strategic choices and its i#ple#entation of those choices deter#ine whether or not these differences will e4ist )P@*arts apparently failed atte#pts to #o&e (pscale+ th(s, co#petiti&e ad&antage ste#s fro# preferences andDor cost advantages
Temporary and Sustainable Competitive Advantage ,ne of the f(nda#entals of econo#ics, and h(#an beha&ior for that #atter, is that if so#ething pro&es to be profitable )or otherwise desirable+ others will atte#pt to i#itate or ac8(ire it. 'h(s, if a fir# de&elops a co#petiti&e ad&antage other fir#s will atte#pt to i#itate whate&er it is that gi&es that fir# an ad&antage. 'his #eans that #ost ad&antages will be relati&ely short@li&ed beca(se of i#itation. Example: 0ell(lar telephone ser&ice pro&iders 8(ickly #atch the offerings of co#petitors:free nights and weekends, #(ltiple phone fa#ily plans, nationwide long distance, &ariable (sage plans, etc. 9ny one of these plan feat(res wo(ld likely be a so(rce of co#petiti&e ad&antage if a single fir# co(ld offer it witho(t be 8(ickly i#itated. -hen these feat(res were first offered, cons(#ers had preferences for one co#pany o&er another. 9fter the #aMor co#petitors all offered these feat(res there was no ad&antage to offering the feat(res. 9 co#petiti&e ad&antage #ay be s(stainable if other fir#s are (nable to i#itate the so(rce of co#petiti&e ad&antage. 'he logic as to why and how co#petiti&e ad&antage can be s(stainable will be co&ered in #ore detail later in the book. 9t this point in the co(rse it is s(fficient to state that co#petiti&e ad&antages will persist (ntil another fir# can eitherE L d(plicate the so(rce of co#petiti&e ad&antage, or L offer a s(bstit(te that is &al(ed as highly as the original so(rce of co#petiti&e ad&antage. )mportant "oint: 5erhaps the #ost i#portant thing for st(dents to (nderstand at the beginning of the co(rse is that when we talk abo(t a s(stainable co#petiti&e ad&antage we do not #ean that the ad&antage will last indefinitely no #atter what co#petitors do. *ost fir#s that see# to ha&e a s(stainable co#petiti&e ad&antage are able to inno&ate repeatedly, s(ch as by introd(cing new prod(cts, o&er ti#e. 'h(s, the ad&antage see#s to be the ability to inno&ate and stay ahead of co#petitors rather than a single prod(ct or ser&ice.
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9 fir#s co#petiti&e ad&antage is also dependent on what cons(#ers want at any gi&en point in ti#e. A.%. a(to#akers )C*, >ord, Heep+ e4perienced se&eral years of pheno#enal sales of sport (tility &ehicles )%A;s+. 3owe&er, cons(#ers appear to be losing their taste for these larger &ehicles. 0oncerns abo(t highway safety and gas cons(#ption see# to be cooling the #arket for %A;s. If this trend contin(es, design ability and prod(ction capacity for %A;s co(ld t(rn fro# a so(rce of co#petiti&e ad&antage to a so(rce of co#petiti&e disad&antage. 'h(s, a co#petiti&e ad&antage can fade away d(e to changes in cons(#er preferences e&en if co#petitors do not co#pete away the ad&antage. Competitive arity 0o#petiti&e parity #eans that a fir# andDor its o(tp(t are &iewed as being abo(t the sa#e as other fir#s, or in other words, abo(t a&erage in the #arketplace. Example: *any people &iew store brand deni# Means as being abo(t the sa#e. %hopko, P@*art, 0ostco, -al@*art, %ears, and 'arget all offer deni# Means. 'hese Means are basic and si#ple clothing. 0ons(#ers apparently do not see i#portant differences a#ong these offerings. 9s a res(lt, these retailers do not enMoy any co#petiti&e ad&antage ste##ing fro# their store brand Means. Competitive Disadvantage 9 co#petiti&e disad&antage can occ(r for #any reasonsE L potential c(sto#ers #ay ha&e an a&ersion )preference not to b(y+ to a fir#s #arket offering Example: %o#e cons(#ers ref(se to shop at -al@*art beca(se of the co#panys policies on &ario(s iss(es. =abor interests arg(e that -al@*art stifles atte#pts to organi6e labor and that it fa&ors offshore labor by p(rchasing fro# foreign prod(cers. ,thers oppose -al@*arts e4pansion policies beca(se they fear that -al@*art dri&es o(t s#aller co#petitors and thereby destroys downtown areas of s#aller towns and cities. -al@*art does not appear to s(ffer significant sales losses as a res(lt of these a&ersions. 3owe&er, a#ong like#inded cons(#ers -al@*art is at a co#petiti&e disad&antage beca(se of these policies. L an (nfa&orable cost str(ct(re d(e to o(tdated and inefficient e8(ip#ent andDor technology L a bad rep(tation If the fir# or the fir#s o(tp(t is &iewed as being inferior to #ost other fir#s, al#ost anything co(ld potentially beco#e a so(rce of co#petiti&e disad&antage. !easuring Competitive Advantage Describe Two Different Measures of Competiti e !d antage 0o#petiti&e ad&antage is often #eas(red in acco(nting ter#s and econo#ic ter#s. 9 fir# is said to ha&e a co#petiti&e ad&antage if one or #ore of its acco(nting #eas(res e4ceed)s+ the ind(stry a&erage for that partic(lar #eas(re. >or e4a#ple, if a fir#s ret(rn
on sales is "7 percent and the ind(stry a&erage is 11 percent, we wo(ld take that as an indication that the fir# had a co#petiti&e ad&antage. ,n the other hand, econo#ic #eas(res of perfor#ance are co#pared to a fir#s own cost of capital to deter#ine if that fir# has a co#petiti&e ad&antage. If a fir# earns a " percent ret(rn on e8(ity and the fir# calc(lates that its cost of capital is only 1" percent, then we wo(ld concl(de that the fir# has a co#petiti&e ad&antage. $oth of these #ethods of assessing the co#petiti&e ad&antage of a fir# point back to o(r definition of a co#petiti&e ad&antageE the ability to create #ore econo#ic &al(e than co#petitors. #ormal $%onomi% &eturn -hen a fir# M(st earns its cost of capital it is said to be earning a nor#al econo#ic ret(rn. %(ch a fir# is #eeting the e4pectations of the #arket with regard to the le&el of risk an in&est#ent in s(ch fir# entails. 9nother way of looking at this idea is that if a fir# is earning a nor#al ret(rn, in&estors are M(st barely willing to keep in&esting in the fir#. If the fir# were to earn any less, in&estors wo(ld p(ll their capital o(t of the fir#. Above #ormal $%onomi% &eturn %pecifically, a fir# is said to be earning an abo&e nor#al econo#ic ret(rn if the fir# is earning #ore than its cost of capital. 9n abo&e nor#al econo#ic ret(rn is indicati&e of a co#petiti&e ad&antage. $y definition, s(ch a fir# is said to be e4ceeding the e4pectations of the #arket. 'his is another i#portant indicator of co#petiti&e ad&antage. 'he fir# is doing better than the #arket e4pects a fir# to do in its partic(lar ind(stry. %(ch a fir# will likely attract new capital as in&estors will be eager to get in on the higher ret(rns of this fir#. 'elo( #ormal &eturn ,f co(rse, a fir# earning less than its cost of capital is said to be earning a below nor#al econo#ic ret(rn. >ir#s cannot s(r&i&e long if they are earning below nor#al econo#ic ret(rns. In&estors will take their capital elsewhere. )mportant "oint: 'he relationships between types of co#petiti&e ad&antage, acco(nting perfor#ance, and econo#ic perfor#ance are fairly straightforward. 9 co#petiti&e ad&antage is said to lead to abo&e a&erage acco(nting perfor#ance and abo&e nor#al econo#ic perfor#ance. 0o#petiti&e parity leads to a&erage acco(nting perfor#ance and nor#al econo#ic perfor#ance. ,f co(rse, co#petiti&e disad&antage is said to lead to below a&erage acco(nting perfor#ance and below nor#al econo#ic perfor#ance.
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C A!!ENGE "UESTI#NS
1. -ill a fir# that has a s(stained co#petiti&e disad&antage necessarily go o(t of b(sinessJ 3ow abo(t a fir# with below a&erage acco(nting perfor#ance o&er a long period of ti#eJ 3ow abo(t a fir# with below nor#al econo#ic perfor#ance o&er a long period of ti#eJ a+ <o, a fir# co(ld ha&e a s(stained co#petiti&e disad&antage and re#ain in b(siness. .e#e#ber that a s(stained co#petiti&e disad&antage si#ply #eans the fir# is generating less &al(e than co#petitors. *any fir#s contin(e to operate e&en tho(gh they do so at a co#petiti&e disad&antage in so#e areas beca(se they (s(ally ha&e so#e ad&antage in another area. If the fir# had no co#petiti&e ad&antages at all, in ti#e the fir# wo(ld likely begin to earn below nor#al econo#ic ret(rns and #ay go o(t of b(siness as e4plained in answer )c+ below. b+ <o, a fir# co(ld ha&e below a&erage acco(nting perfor#ance and re#ain in b(siness. 9s long as the ret(rns to the owners of the fir#s are satisfactory, the fir# will re#ain in b(siness, e&en if those ret(rns are less than the ind(stry a&erage. c+ Ges, a fir# that earns a below a&erage econo#ic ret(rn o&er a long period of ti#e will e&ent(ally go o(t of b(siness. 'he reason for this is that the fir# is earning less than its cost of capital. In ti#e, the fir# wo(ld be (nable to attract capital and wo(ld be forced to go o(t of b(siness.
". 0an #ore than one fir# ha&e a co#petiti&e ad&antage in an ind(stry at the sa#e ti#eJ Is it possible for a fir# to si#(ltaneo(sly ha&e a co#petiti&e ad&antage and a co#petiti&e disad&antageJ a+ Ges, #ore than one fir# can ha&e a co#petiti&e ad&antage in an ind(stry at the sa#e ti#e. 'wo or #ore fir#s co(ld ha&e ad&antages in different areas and thereby appeal to different c(sto#ers:each fir# ha&ing an ad&antage o&er other fir#s with respect to different c(sto#ers. b+ Ges, a fir# can si#(ltaneo(sly ha&e a co#petiti&e ad&antage and a co#petiti&e disad&antage. -al@*art is a good e4a#ple. -al@*art has a co#petiti&e ad&antage in distrib(tion logistics and infor#ation technology. It also has a disad&antage in rep(tation a#ong so#e c(sto#ers beca(se of its labor and location policies. ,n balance, it wo(ld appear that the ad&antages -al@*art enMoys &astly o(tweigh its disad&antages. Problem Set Answers 1. -rite obMecti&es for each of the following #ission state#ents.
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a. b. c. d.
-e will be a leader in phar#ace(tical inno&ation 0(sto#er satisfaction is o(r pri#ary goal -e pro#ise on ti#e deli&ery 5rod(ct 8(ality is o(r first priority.
Ans(ers a. 9t least "12 of o(r sales in the ne4t fi&e years will be generated fro# new prod(cts. b. Ens(re that c(sto#er co#plaints are less than 12 of all (nits sold. c. 9t least 982 of all deli&eries each 8(arter will be consistent with the ter#s negotiated with o(r c(sto#ers. d. Ens(re that %i4 %ig#a is i#ple#ented across all #an(fact(ring lines within two years. ". .ewrite each of the following obMecti&es to #ake the# #ore helpf(l in g(iding a fir#s strategic #anage#ent process. a. b. c. d. -e will introd(ce fi&e new dr(gs -e will (nderstand o(r c(sto#ers needs. 9l#ost all of o(r prod(cts will be deli&ered on ti#e. 'he n(#ber of defects in o(r prod(cts will fall.
Ans(ers a. >or the ne4t fi&e years, one new dr(g will be s(ccessf(lly bro(ght to #arket each year. b. 0(sto#er profiles will be de&eloped for each of o(r c(sto#ers thro(gh point of sale s(r&eys leading to at least 982 acc(racy in o(r c(sto#er database within two years. c. =ess than 12 of o(r deli&eries each 8(arter will fail to #eet o(r specified deli&ery ti#es d. Defects will not e4ceed 1 defect per 1 , (nits prod(ced per 8(arter. 7. 9re fir#s with the following financial res(lts earning below nor#al, nor#al, or abo&e nor#al econo#ic perfor#anceJ a. b. c. d. .,9 Q 14.72, -900 Q 1".82 .,9 Q 4.72, -900 Q !./2 .,9 Q !.12, -900 Q 9."2 .,9 Q 8.72, -900 Q 8.72
Ans(ers a. b. c. d. 9bo&e nor#al econo#ic perfor#ance $elow nor#al econo#ic perfor#ance $elow nor#al econo#ic perfor#ance <or#al econo#ic perfor#ance
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4. 9re these sa#e fir#s earning below a&erage, a&erage, or abo&e a&erage acco(nting perfor#anceJ a. b. c. d. .,9 Q 14.72, Ind(stry 9&g. .,9 Q 11."2 .,9 Q 4.72, Ind(stry 9&g. .,9 Q 4.12 .,9 Q !.12, Ind(stry 9&g. .,9 Q !.12 .,9 Q 8.72, Ind(stry 9&g. .,9 Q 9.42
Ans(ers a. b. c. d. $elow a&erage acco(nting perfor#ance 9&erage )slightly abo&e+ acco(nting perfor#ance 9bo&e )a&erage+ a&erage acco(nting perfor#ance $elow a&erage acco(nting perfor#ance
1. Is it possible for a fir# to si#(ltaneo(sly earn abo&e nor#al econo#ic ret(rns and below a&erage acco(nting ret(rnsJ 3ow abo(t below nor#al econo#ic ret(rns and abo&e a&erage acco(nting ret(rnsJ -hy or why notJ If this can occ(r, which #eas(re of perfor#ance is #ore reliableE econo#ic perfor#ance or acco(nting perfor#anceJ -hyJ Ans(er Cenerally, there is a correlation between econo#ic and acco(nting #eas(res of co#petiti&e ad&antage. It is possible for a fir# to earn abo&e a&erage acco(nting perfor#ance and si#(ltaneo(sly below nor#al econo#ic perfor#ance. 'he sa#e is tr(e for below a&erage acco(nting perfor#ance and si#(ltaneo(sly abo&e a&erage econo#ic perfor#ance. In the for#er, the fir# is not earning its cost of capital b(t is earning abo&e ind(stry a&erage acco(nting perfor#ance. In the latter, the fir# has a &ery low cost of capital and is earning at a rate in e4cess of this cost, b(t still below the ind(stry a&erage.