Chapter 1 The Concept of Strategy Daniel Trejo Daniel Hanson Jonathan Kiser Blake Hiett

Key Points to Chapter 1 The origins of how strategy was developed and how views of strategy have changed over time Some basic principles as to what strategy is and how it is applied in todays world Learn about some of the questions surrounding corporate values and social responsibility in the workplace Understand the basic approach to strategy that underlies the book

Origins of Strategy Strategy comes from the Greek work strategic meaning generalship The concept of strategy however did not originate with the Greeks, but with Sun Tzu’s classic the Art of War (500 B.C.) Regarded the first treatise on strategy

Origins of Strategy Cont’d Strategy is concerned with winning the war. Strategy is the overall plan for deploying resources to establish favorable position Strategic decisions, whether military or business share three common characteristics They’re important involve a significant commitment of resources are not easily reversible

Evolution of business strategy Business strategy has been driven more by the practical needs of business than by the development of business 50s and 60s senior execs. Experienced increasing difficulty in coordinating decisions and maintaining control in companies that were growing in size and complexity

Corporate Planning Developed in the late 50s Macroeconomic forecasts provided the foundation for the new corporate planning Typical format was a 5 year format Set goals and objectives Forecast key economic trends (including market demand, market share, revenue, costs, and margins Established priorities for different products and business areas of the firm and allocated capital expenditures By the mid 60s most large US and European companies had set up corporate planning depts.

Fall of corporate planning Due to the oil shocks of 74 and 79 and failure of diversification to deliver the anticipated synergies. This lead to an era of macroeconomic instability, combined with increased international competition from resurgent Japanese, European and Southeast Asian firms Firms could no longer plan their investments, new product introductions and personnel requirements 3 to 5 years ahead. They could no longer forecast that far into the future This resulted in a shift from planning to strategy making where the focus was less in detailed management of companies growth paths than on positioning the company in markets and in relation to competitors in order to maximize the potential for profit. This was know as strategic management.

Strategic management Associated with increasing focus on competition as the central characteristic of the business environment and competitive advantage as the primary goal of strategy Also directed attention to business performance During the late 70s and into the 80s attention focused on sources of profit within the industry environment Michael porter of Harvard business school pioneered the application of industrial organization economics to analyzing industry profitability Other studies focused on how profits were distributed between different firms in an industry, in particular the impact of market share and experience upon costs and profits

Strategic Management Cont’d During the 90s focus of strategy analysis shifted from the sources of profit in the external environment to the sources of profit within the firm. Resources and capabilities of the firm became regarded as the main source of competitive advantage and the primary basis for formulating strategy

TMT Technology, Media, Telecommunications Technology reshaped industries Digital technologies are associated with standard wars, the emergence of winner take all markets and, the potential for strategic innovation as firms seek the blue oceans of uncontested market space. Due to continuous change and relentless competition, strategy becomes less about building positions of sustained competitive advantage and more about developing the responsiveness and flexibility to create successive temporary advantages.

Resource based view Is the emphasis on internal resources and capabilities and encourages firms to identify how they are different from their competitors and design strategies that exploit theses differences rather that seeking attractive markets and favorable competitive positions Michael porters answer to the question, “What is strategy?” was, “Competitive strategy is about being different. It means deliberately choosing a different set of activates to deliver a unique mix of value.”

Michael Porters Response http://youtu.be/ibrxIP0H84M

5 Main Questions of Strategy What is strategy? How do we describe a firm’s strategy? How do we identify a firm’s strategy? How is strategy made What roles does strategy perform?

Which industries should we be in? What is Strategy? Corporate strategy-the scope of the firm in terms of the industries and markets in which it competes. Business strategy- how the firm competes within a particular industry or market How do we make money? Which industries should we be in? Corporate Strategy How should we compete? Business Strategy

How to Describe a Firm’s Strategy Static Where are we competing? Product scope: vacuum cleaner Hand dryers, fans and an array of other product Geographical scope: product sales in 52 countries Vertical scope: a range of products can be purchased direct from Dyson through its web site  How are we competing? By focusing on invention, design and engineering. Dynamic What do we want to become? A household name i.e Dysoning rather than hovering What do we want to achieve? Sales growth through geographic expansion: 80 countries by 2015  How will we get there? Through high levels of investment in R&D and organic growth

How Do We Identify a Firm’s Strategy? The mission statement is basic statement of organizational purposes- “ Why we exist” A statement of principle or values outlines- “ What we believe in and how we will behave” The Vision statement projects- “ What we want to be” The strategy statement articulates- “ What our competitive game plan will be”

How is strategy made? Intended strategy- conceived of by the top management team Realized strategy- the actual strategy that is implemented Emergent strategy-the decisions that emerge from the complex processes in which individual managers interpret the intended strategy and adapt to changing external circumstances

The Roles that Strategy Performs Strategy as Decision Support Strategy improves decision making in 3 different ways 1) Strategy simplifies decision making 2) Strategy-making process allows knowledge to be pooled 3) Strategy-making process facilitates the use of analytic tools Strategy as a Coordinating Device Strategy can promote coordination through communication Buy-In is essential throughout the organization Goals, commitments, and performance targets can guarantee can guarantee the proper strategy is being used

The Roles that Strategy Performs Cont’d Strategy as a Target Forward-looking strategies set up a direction for an organization Stretch and resource leverage should be key to an organization’s strategy Strategy as Animation & Orientation Mobilized, encouraging, and working in sync with one another Strategize as accurately as possible

Shareholders or Stakeholders All organizations strive to create value by activities they partake in Value is distributed between: employees, customers, owners, ect Take the value and turn it into profits Stakeholders approach can be conflicting for top management Strategy designed in interest of all stakeholders is a hot issue Different areas of the world have different interest

Profit and Purpose Profit is not the sole motivation factor for companies Pursuit of profits often isn’t achieved by firms 1) Profit is only a effective if managers know what determines profit 2) Maximizing shareholders wealth isn’t a great motivating tool 3) Choosing the right strategy can motivate all employees

Corporate Social Responsibility “A firm’s obligation to society to exceed its minimum financial and legal requirements to stakeholders and to take into account the social and environmental impacts of its decisions.”

Debate Over CSR What are company’s obligations to society as a whole? Milton Friedman declared corporate social responsibility to be both unethical and undesirable. “There’s one & only one social responsibility of business – to use its resources & engage in activities designed to increase profits so long as it stays within the rules of the game, which is to say, engages in open & free competition without deception or fraud.” - Milton Friedman Unethical because it involves management spending owners’ money on projects that owners had not approved of; undesirable because it involves corporate executives determining the interests of society.

What is CSR? https://www.youtube.com/watch?v=yzvy5IgqTvw

Notions of the Public Corporation William Allen contrasts two different notions: ‘The property conception’, which views the firm as a set of assets owned by stockholders. ‘Social entity conception’, which views the firm as the community of individuals that is sustained & supported by its relationships with its social, political, economic and natural environment. “To regard profit as the purpose for which companies exist is a tragic confusion” ‘The firm as property’ view implies that management’s responsibility is to operate in the interests of shareholders. ‘The firm as social entity’ implies a responsibility to maintaining the firm within its overall network of relationships and dependencies. Charles Handy dismisses the ‘firm as property’ view as a hangover from the 19th century - in the 21st century shareholders invest in companies but are not ‘owners’ in any meaningful sense.

Narrowing The Focus We limit our discussion to private sector firms operating in market economies assuming that such firms operate in the interests of their owners by seeking to maximize profits in the long run. “The foundations of mainstream strategy lie in analysis of competition and firms’ quests to outperform their rivals.” -Strategy takes on a very different meaning and requires a very different approach in non-competitive, public policy contexts. -We justify our second simplifying assumption by pointing to four key considerations:

Narrowing The Focus Cont’d The four key considerations: Competition- competition erodes profit. The market for corporate control- teams that fail to max profits will be replaced by teams that do Convergence of stakeholder interests-profitability requires loyalty from employees, trusting relationships with suppliers and customers, and support from the government and the communities Simplicity-considering multiple goals and specifying trade-offs between them vastly increases the complexity of decision making

The Basic Framework For Strategy Analysis The Firm Goals and values Resources and capabilities Structure and systems The Industry Environment Competitors Customers Suppliers Strategy The firm embodies three sets of these elements: goals and values, resources and capabilities, and structure & systems. The industry environment represents the core of the firm’s external environment and is defined by the firm’s relationships with customers, competitors, and suppliers. Hence, we view strategy as forming a link between the firm and its external environment.

The Basic Framework Cont’d Fundamental to this view of strategy as a link between the firm and its external environment is the notion of strategic fit. For a strategy to be successful, it must be consistent with the firm’s external environment and with its internal environment. The failure of many companies is caused by lack of consistency with either the internal or external environment.

Summary of Chapter 1 The origins of how strategy was developed and how views of strategy have changed over time Some basic principles as to what strategy is and how it is applied in todays world Learn about some of the questions surrounding corporate values and social responsibility in the workplace Understand the basic approach to strategy that underlies the book

Questions?

Quiz over Chapter 1 1. Which of the following is not conductive to success? A. Having a leader or leadership team that can make decisions and marshal the resources and capabilities needed to implement those decisions. B. Basing strategy on the objective appraisal of resources. C. Developing strategy on the basis of frequent and rapid revisions to goals. D. Developing strategy on the basis of a detailed knowledge of the competitive environment. 2. The decision by the Indian multi-national company, Tata, to extend its activities steel production into the motor industry and consultancy services provides an illustration of strategy at which of the following levels? A. Business B. Functional C. Corporate D. International

Quiz Cont’d 3. Which of the following statements offers the best definition of a mission statement? A. It outlines the organization’s game plan with respect to competition. B. It addresses why the firm exists. C. It projects what the organization wants to look like in the future. D. It states how those working for the organization should behave. 4. Which of the following statements best describes an emergent strategy? A. The strategy that emerges from the deliberations of the top management team. B. The scheme of action and the maneuvers that a firm deploys in order to win a competitive battle. C. The decisions that emerge from complex processes in which individual managers interpret the intended strategy of the top management team. D. The actual strategy that is put into practice.

Quiz Cont’d 5. To identify a firm’s strategy you should: A. Look at the firm’s mission statement B. Explore the public pronouncements of the firm’s chief executive officers and his senior management team. C. Look at the decisions the firm has taken and what it actually does. D. All of the above. 6. In the context of strategy, the term ‘value’ is best defined as: A. The profits a firm makes from its sales of good or services. B. A measure of the extent to which goods or services are perceived by customers as meeting their needs or wants and is reflected in the price they are willing to pay for these goods or services. C. The revenue a firm generates from its sales of goods or services. D. The difference between the amount that a producer receive from the sale of good or service and the lowest amount that this producer would be willing to accept for that good or service.

Quiz Cont’d 7. Which of the following statements best describes Grant’s notion of ‘planned emergence’? A. Top management passes strategic directive and guidelines down the organization but decisions are enacted locally and adaption occurs. B. It is a series of actions designed to achieve a specific goal or effect. C. It is a process of bottom-up decision making. D. It is a process of trial and error learning from which strategy emerges.  8. In the context of strategy stakeholders are: A. Individuals or groups that have a financial stake in the company. B. Individuals and groups external to the firm that have the power to influence the resource allocation decision the firm makes. C. Groups or coalitions within the firm that shape the decisions taken by senior. D. Individuals or groups that are affected by, or can affect, a firm’s actions.

Quiz Cont’d 9. Which of the following statements is false? Organizations who make profit their primary aim often fail to achieve this goal because: a. Profit maximization involves charging high prices, cutting costs and reducing quality, which deters consumers. b. Obsession with profits can blinker managers’ perceptions of the real drivers of superior performance. c. The single-minded pursuit of profit is unlikely to encourage cooperation and unity amongst stakeholders. d. The maximization of returns to shareholders is unlikely to inspire employees.  10. Which of the following statements best describes Corporate Social Responsibility? a. The obligation that a firm has to make sure its managers act in accordance with the law. b. A firm’s obligation to society to take into account the affect of its decisions on the environment. c. A firm’s obligation to society to exceed its minimum financial and legal requirements to stakeholders and to take into account the social and environmental impact of its decisions. d. The duty of care the firm’s top management team has towards its employees and customers.

Answers to Quiz 1. C 2. D 3. B 4. C 5. D 6. B 7. A 8. D 9. A 10. C