Strategic Management MGMT S-5000 (32759), Summer, 2011 Tuesday/Thursday, 3:15-6:15 PM, Sever 203 Sharon A. Mertz

S-5000 – Strategic Management Topics: Welcome Course Outline & Overview Evaluation (refer to syllabus for guidance): Class Participation – 20% Case Analyses (2 x 15%) – 30%. Work with a partner or individually. Group Research Projects/Presentations – 20%. Final Case - 30% - individual effort Expectations Introducing Strategic Management Group Work

Chapter 1 Introducing Strategic Management

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

UNDER ARMOUR AT A GLANCE 1996 2006 Revenues $17,000 $430,000,000 57,300,000 Net Income 1,800,000,000 Equity Value Brands and Trademarks Under Armour, HeatGear, ColdGear, AllSeasonGear, LooseGear, Click Clack Kevin Plank’s Vision To become the world’s #1 performance athletic brand

STRATEGY Strategos: “the general’s view” Holistic “big picture”   STRATEGY Strategos: “the general’s view” Holistic “big picture” General Lower officer (e.g., supply logistics infantry, heavy armored vehicles) Tactical details

THE MILITARY ROOTS OF STRATEGY “The individualist without strategy who takes opponents lightly will inevitably become the captive of others.” – Master Sun

THREE OVERARCHING THEMES   Implementing a good strategy is at least as important as creating one, yet many managers give too little thought to implementation To succeed, the formulation of a good strategy and its implementa-tion should be inextricably connected Strategic leadership is responsible for making substantive resource allocation decisions and developing key-stakeholder support of the strategy Firms and industries are dynamic in nature  Strategic leader- ship is essential if a firm is able to both formulate and imple-ment strategies that create value We need to see a firm’s competitive position, not as a snapshot, but as an ongoing movie

BUSINESS STRATEGY AS AN ACADEMIC DISCIPLINE Added, December 2010 BUSINESS STRATEGY AS AN ACADEMIC DISCIPLINE Relatively recent – gained significant traction since the 1960’s Many perspectives – Whittington provides one example: Internally focused Externally focused Source: Whittington, What is Strategy - and does it matter? (2005)

THE STRATEGIC MANAGEMENT PROCESS Strategic analyses Internal External Strategy Vision and mission Arenas Vehicles Differentiators Staging Economic logic Implementation levers and Strategic leadership Fundamental organizational purpose 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?

ADDITIONAL CHALLENGES AND OPPORTUNITIES CONFRONT DIVERSIFIED BUSINESSES Added December, 2010 In which businesses will we compete? How can the corporate parent added value to the various lines of business? How will diversification or entry into a new industry enable us to compete in our other industries?

STRATEGY AND IMPLEMENTATION ITERATE WAL-MART EXAMPLE Compete as discount retailer in rural markets Leverage inventory and sourcing systems to be low-cost leader Strategy: The process of deciding what to do 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 Intel’s original focus (1970s & 1980s) Focus on micro-processor segment By 1984, 95% of Intel revenue came from the microprocessor segment Design and manufacture of Dynamic, Random-Access Memory Chips (DRAM) Unplanned experimental venture to make microprocessors for Busicom, a Japanese calculator maker

BUSINESS STRATEGY DIAMOND 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 Arenas What will be our speed and sequence of moves? Speed of expansion? Sequence of initiatives Staging Economic logic How will we get there? Internal development? Joint ventures? Licensing/franchising? Experimentation? Acquisitions? Vehicles Staging Vehicles 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 Differentiators How will we win? Image? Customization? Price? Styling? Product reliability? Speed to market? Differentiators

JET BLUE STRATEGY Low fare commercial air carrier Arenas Underserved but over-priced US cities Vehicles Start from scratch and achieve all growth internally (i.e., do not purchase a regional airline) Objective To “bring humanity back to air travel” Differentiators High level of service compared to low fare competitors (e.g., leather seating, satellite TV) Grow from one route between two cities to serving 20 cities in just 3 years Staging Economic logic Secure cost advantage by being willing and able to perform key tasks differently One type of plan JFK home base Secondary location

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

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

FRAMEWORK FOR STRATEGY IMPLEMENTATION Key Factors of Strategy Implementation Implementation levers Organizational structure Systems and processes People and rewards Realized and Emergent Strategies Intended Strategy Strategic leadership Lever- and resource-allocation decisions Decision support among stakeholders

COMPETITIVE ADVANTAGE   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?

THREE PERSPECTIVES OF COMPETITIVE ADVANTAGE Internal External Dynamic 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 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 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 AND EXTERNAL DIMENSIONS OF THE DYNAMIC PERSPECTIVE Competitive advantage can shift quickly in unstable markets External dimension: Useful for “high velocity” markets, or examining industries characterized by multi-market competition. Internal dimension: Identify which firm resources and capabilities enable core competency of embracing continuous or disruptive change

Chapter 2 Leading Strategically Through Effective Vision and Mission

OBJECTIVES 1 Explain how strategic leadership is essential to strategy formulation and implementation 2 Understand the relationships among vision, mission, values and strategy 3 Understand the roles of vision and mission in deter-mining strategic purpose and strategic coherence 4 Identify a firm’s stakeholders and explain why such identification is critical to effective strategy formula-tion and implementation 5 Explain how ethics and biases may affect strategic decision-making

PULLING A USD 15 BILLION COW OUT OF A DITCH Xerox reaches profitability The fall from the nifty 50 Mulcahy takes over She leads a turnaround Xerox introduces the Xerox 914 copier in 1959. This copier transformed the work place Xerox was charter member of the “nifty 50”-50 stocks most favored by institutional investors Since 1970s, however, Xerox has been crippled by competition (mostly Japanese) October 2001, Xerox reports first quarterly loss in16 years. Mulcahy is not obvious choice for top position She lacks product development and financial expertise She gets it because the board has confidence in her “strategic mind”. Refines Xerox vision and reminds people of core values Aligns operation with the refined mission and values Sells Xerox’s China and Hong Kong operations and half of a stake in a joint venture with Fuji Closes down inkjet business Annual expenses cut by USD 1.7 billion Sold USD 2.3 billion worth of non-core assets Reduced long-term debt to USD 9.2 billion from USD 15.6 billion Xerox returns to profitability in 2002, generating USD 1.9 billion in operating cash flow and USD 91 million in net income on USD 15.8 billion in sales

STRATEGIC LEADERSHIP – THE BASIC RESPONSIBILITY OF THE CEO Modified title, December, 2010 STRATEGIC LEADERSHIP – THE BASIC RESPONSIBILITY OF THE CEO Leadership: Strategic leadership: The task of exerting influence on other people’s pursuit of goals in an organizational context Managing an overall enterprise and influencing key organizational out- comes, such as company wide performance, competitive superiority, innovation, strategic change, and survival

SOME BUSINESS LEADERS BECOME CELEBRITIES " "I can't think of anything that isn't cloud computing with all of these announcements. The computer industry is the only industry that is more fashion-driven than women's fashion. Maybe I'm an idiot, but I have no idea what anyone is talking about. What is it? It's complete gibberish. It's insane. When is this idiocy going to stop?" "Larry Ellison's Brilliant Anti-Cloud Computing Rant" The Wall Street Journal, 25 September 2008

EXECUTIVE ROLES Interpersonal roles Figure head Leader Liaison Informational roles Monitor Disseminator Spokesperson Formal authority and status Decision roles Entrepreneur Disturbance handler Resource allocator Negotiator

LEVEL 5 LEADERS Capabilities Build greatness through combination of will and humility Level 5 leaders Can lead a group to superior levels of performance Level 4 leaders Organize people resources to accomplish predetermined objectives Level 3 leaders Work effectively with others as a member of a team to achieve group objectives Level 2 leaders Make individual contributions through talent and work ethic Level 1 leaders

TWO ATTRIBUTES OF LEVEL 5 LEADERS The ability to translate strategic intent into the resolve needed to pursue a strategy and usually to make hard choices over a period of time Being someone who prefers to share credit rather than hog it who tends to shun public attention, act with calm determination, and exercise ambitions on the company’s behalf rather than one’s own Professional will Professional modesty “You can accomplish anything in life, provided that you do not mind who gets the credit.” - Harry S. Truman

WHAT DOES IT TAKE TO BE A CEO? An Ivy league MBA? Charisma? There is little consensus on whether personality or background matters more International management experience? Integrity

CRITERIA OF AN EFFECTIVE TOP-MANAGEMENT TEAM The team responds to a complex and changing environment. 2. The team can manage the needs of interdependent but often diverse units, arenas, or functional areas. 3. The team has a valuable and effective social network. 4. The team is able to develop a coherent plan for executive succession.

“Social” is Not a New Phenomenon Added slide, December, 2010 “SOCIAL” IS NOT A NEW PHENOMENON “Social” is Not a New Phenomenon Research began in the late 1800’s: Durkheim and Tönnies Tönnies : social groups exist as personal or direct social ties, either linking individuals who share beliefs (Gemeinschaft) or impersonal, formal and instrumental social links (Gesellschaft) Early 20th century: Simmel, explores the structural patterns of social interactions 1930’s onward: interest grows at institutions such as Harvard, University of Chicago, University of Toronto, and others. The area is researched by many; a few major contributors and example research topics: Granovetter: The Strength of Weak Ties Freeman: Visualizing Social Networks (importance of imagery in network research) Wellman: Computer Networks as Social Networks; Internet Effect on Social Capital

VISION, MISSION AND STRATEGY Text, exhibit 2.6. VISION, MISSION AND STRATEGY Strategy The central, integrated, externally-oriented concept of how the firm will achieve its objectives. Consists of 5 elements: arenas, vehicles, differentiators, staging, and economic logic Vision and Mission Strategic Goals and objectives Fundamental purpose Values View of future Specific targets Measurable outcomes

VISION – USES OF AMBITION AND AMBIGUITY Sony’s vision in early 1950’s: “becoming the company that most changes the worldwide image of Japanese products as being of poor quality.” Vision statements generally express long-term action horizons, are ambitious and force the firm to stretch. their ambiguity allows flexibility for changing strategy or implementation tactics CitiBank’s vision in 1915: “the most powerful, the most serviceable, the most far reaching world financial institution the world has ever seen.”

EXAMPLE – AN EXCERPT FROM THE SAP MISSION STATEMENT Our mission is to help the world run better in order to create enduring prosperity for people everywhere. We help customers around the globe perform at a significantly higher level of effectiveness and efficiency by enabling closed-loop performance optimization to achieve profitable, sustainable growth. To succeed, we strive to build from our established leading position in the business software market and accelerate business and IT innovation for firms and industries. In reaching for this goal, we are also contributing to global economic development on a grand scale. Sap 20F, March, 2009

VISION ANCHORED IN GOALS AND OBJECTIVES Examples Wal-Mart Grow sales and profits by 70% per year Goals and objectives Ryanair Be Europe’s largest airline in 7 years Matsushita To become a “super manufacturing company”

STRATEGY COHERENCE Strategic coherence is Staging Differentiators Economic logic Vehicles Arenas The symmetrical co-alignment of the five elements of a firm’s strategy The congruence of policies in functions (e.g., finance, production, marketing) with these elements The overarching fit of various businesses under the corporate umbrella Strategic coherence is Congruence

BENEFITS OF USING STAKEHOLDER ANALYSIS Can use the opinions of the most powerful stakeholders to shape your strategy and tactics at an early stage. Gain support from powerful stakeholders to help win more resources. Can ensure that stakeholders fully understand what you are doing and understand the benefits of your project. Can anticipate what people’s reactions to your project may be and build actions into the plan that will win people’s support.

STAKEHOLDER ANALYSIS After identifying stakeholders ask Have I identified any vulnerable points in either the strategy or its potential implementation? Which groups are mobilized and active in promoting their interests? Have I identified supporters and opponents of the strategy? Which groups will benefit from successful execution of the strategy and which may be adversely affected? Where are various groups located? Who belong to them, and who represents them? Steps in identifying stakeholders Determine influences on strategy formulation decisions Determine stake-holders power and influence over strategy execution decisions Determine the effects of strategic decisions Stakeholders: Individuals or groups who have an interest in an organization’s ability to deliver intended results and maintain the viability of its products and services

MAPPING STAKEHOLDER INFLUENCE AND IMPORTANCE Importance of Stakeholder Influence of stakeholder Little/No importance Moderate importance Significant importance Unknown Unknown Little/No importance Moderate importance Significant importance

STAKEHOLDER MANAGEMENT PLAN

Governance Sets the Boundaries Governance sets the tone at the top and establishes the culture of the organization, including attitude toward risk management and compliance. The intention of SOX was to instill good governance, but the approach to its implementation did not deliver on that promise. A governance framework has the benefit of: Setting business goals for the enterprise and validates enterprise strategy. It ensures growth or mission enhancement with an appropriate amount of risk. It provides focus to strategic initiatives. Setting the strategy to support business goals and implementation plan for the strategy. It provides clarity and direction as to how the business goals will be met, and coordinates across the enterprise. Aligns spending with business goals. It ensures that spending for the implementation of enterprise initiatives is consistent with its priority level. Corporate Governance – the role of owners, directors, and Managers in making corporate decisions Governance frameworks focus on internal control: The reliability and integrity of (financial) information Compliance with policies, plans, procedures, laws and regulations The safeguarding of assets The economical and efficient use of resources The accomplishment of established objectives and goals for operations or programs

ETHICS AND BIASES Have any potential biases clouded our decision-making process? Is the decision ethical? New strategy – A new means to accomplish goals Implementation – Executing new strategy to realize goals Authority structures Incentive systems Role of corporate governance Common illusions about ourselves (e.g., favorability optimism , control) Escalating commitments Self-serving fairness bias Overconfidence bias Ethnocentrism and stereotyping Risk assessment