Chapter 1

Introducing Strategic Management

OBJECTIVES

1 Understand what a strategy is and identify the difference between business-level and corporatelevel strategy Understand the relationship between strategy 2 formulation and implementation

3 Describe the determinants of competitive advantage

4 Recognize the difference between a fundamental and a dynamic competitive advantage 5 Understand why we study strategic management

A TALE OF TWO STORES

Rapid growth, driven by endbased locations and companycontrolled factories Experts believe Sears way was the only way to compete The paragon of retailers 1970 1891 1924 Moves into on-premise retailing/General Robert Wood takes over 1960 1980 1990 2000 2005 A Firms performance is directly related to the quality of its strategy and its competency in implementing it

Sears launches catalog business

Takes control of production and distribution

Financial trouble; sells off all non-retail businesses

Acquired by KMart

Expands into banking, investments, real estate services, and insurance Perfects model; grows; expands into new markets (international) and store concepts (Sams clubs)

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

Dizzying growth

1962 1970

1980

2000 Invests $500 million in inventory management technology 2

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

TWO RETAILERS AT A GLANCE

Sears
Year founded Stores 1980 Stores 2004 1891 864 2026

Wal-Mart
1962 600 5289 $1,643 million $285,222 million $55 M(3.3% return on sales) $10,267 M (3.6% return on sales) USD 1 billion USD 200.2 billion

Revenues 1980 Revenues 2004

Net profits 1980 Net profits 2004 Market capitalization 1980 Market capitalization 2004

$25,194 million $36,100 million

606M (2.4% return on sales) 507M (-1.4% return on sales) USD 4.8 billion USD 12.2 billion

A TALE OF TWO RETAILERS PERFORMANCE MEASURES

USD millions

THREE OVERARCHING THEMES

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

Firms and industries are dynamic in nature

To succeed, the formulation of a good strategy and its implementation should be inextricably connected Strategic leadership is responsible for

making substantive
resource allocation decisions and

developing keystakeholder support of the strategy

Strategic leadership is essential if a firm is able to both formulate and implement strategies that create value

We need to see a firms competitive position, not as a snapshot, but as an ongoing movie
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STRATEGY

Strategos: the generals view

Holistic big picture General

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

Tactical details

THE STRATEGIC MANAGEMENT PROCESS

Strategic analyses

Internal External

Strategy
Vision and mission

Fundamental
organizational purpose

Arenas Vehicles Differentiators Staging Economic logic

Implementation levers

and
Strategic leadership

Organizational
values

The central, integrated, externally oriented concept of how a firm will achieve its objectives

QUESTIONS OF CORPORATE-LEVEL AND BUSINESS-LEVEL STRATEGY

Unit 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? Business-level strategy should ask

How do we compete in this market

today?

How will we compete in this market

in the future?

STRATEGY AND IMPLEMENTATION ITERATE

WAL-MART EXAMPLE

Strategy:
The process of deciding what to do

Compete as discount retailer in rural markets

Leverage inventory and sourcing systems to be low-cost leader

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

Invest heavily in organizational structure, systems, and processes

UNPLANNED ACTIONS CAN DRIVE STRATEGY

Intels original focus (1970s & 1980s)

Design and manufacture of Dynamic, RandomAccess Memory Chips (DRAM) By 1984, 95% of Intel revenue came from the microprocessor segment

Focus on microprocessor segment

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

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BUSINESS STRATEGY DIAMOND

Arenas

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? Vehicles

Arenas

Staging

What will be our speed and

sequence of moves? Speed of expansion? Sequence of initiatives Economic logic

Staging

Economic logic

Vehicles

How will we get there?

Internal development? Joint ventures? Licensing/franchising? Experimentation? Acquisitions?

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?

Differentiators Differentiators

How will we win?

Image? Customization? Price? Styling? Product reliability? Speed to market?

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PROFITABILITY AND MARKET VALUATION OF US AIRLINE INDUSTRY

Profitability

Market valuation

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JET BLUE STRATEGY

Arenas

Low fare commercial air carrier Underserved but over-priced US cities Start from scratch and achieve all growth

Vehicles Objective To bring humanity back to air travel

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

High level of service compared to low fare competitors

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

Grow from one route between two cities to serving 20

Strategy cities in just 3 years

Secure cost advantage by being willing and able to

Economic logic perform key tasks differently One type of plan JFK home base Secondary location
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GOALS OF STRATEGY IMPLEMENTATION

1 To make sure strategy formulation is comprehensive and well informed 2 To translate good ideas into actions that can be executed (and sometimes to use execution to generate or identify good ideas)

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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

Key Factors of Strategy Implementation

Implementation levers

Intended Strategy

Organizational structure Systems and processes People and rewards

Realized and Emergent Strategies

Strategic leadership Lever- and resource-allocation decisions

Decision support among stakeholders

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IMPLEMENTATION LEVERS
Implementation levers Organizational structure

Description
Structure is the manner in which responsibilities, tasks, and people are organized. It includes the organizations authority structure, hierarchy, units, divisions, and coordinating mechanisms Systems are all the organizational processes and procedures used in daily operations. These include control and incentive systems, resource-allocation procedures, information systems, budgeting, and distribution 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 firms strategy. In addition, rewards how you pay your people can accelerate the implementation of your strategy or undermine it
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Systems and processes

People and rewards

COMPETITIVE ADVANTAGE

Competitive Advantage: a Firms 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

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 firms 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

Dynamic Suggests that in dynamic, rapidly changing markets, a firms 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

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SUMMARY

1 Understand what a strategy is and identify the difference between business-level and corporate-level strategy 2 Understand the relationship between strategy formulation and implementation

3 Describe the determinants of competitive advantage

4 Recognize the difference between a fundamental and a dynamic competitive advantage 5 Understand why we study strategic management

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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 firms strategy,

construct a high-impact job-application cover letter.

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GROUP ACTIVITY

Identify a firm that may be thinking of expanding

into new international markets.

Apply the staging element of the strategy

diamond to the firms expansion opportunities or plans.

Which markets should it target first and why? How will international expansion be related to the
firms business and corporate strategies?

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