Temple University BA 951 Policy Formulation and Administration Ram Mudambi Temple University (USA) and University of Reading (UK) Go over syllabus Textbook Blackboard site Groups Grading Class participation – self-assessment, but I will check it If you cannot attend a class, I will assign you your average participation grade for all other sessions for the missed sessions. Quiz – 1 hour, four case-related analytical questions Presentations – please bring in one hard copy of PP overheads for me Please follow guidelines in text regarding case analysis, for presentation as well as final case analysis. © Ram Mudambi, Temple University, 2006

Lecture 1 What is Strategic Management? BA 950 Policy Formulation and Administration Lecture 1 What is Strategic Management? © Ram Mudambi, Temple University, 2006

Overview What is strategy? An plan of action a company takes to attain superior performance. Why do some firms succeed while others fail? A central objective of strategic management is to learn why this happens. What is the strategic management process? The process by which managers choose a set of strategies for the enterprise to pursue its vision. © Ram Mudambi, Temple University, 2006

Superior Performance Superior performance Competitive advantage One company’s profitability relative to that of other companies in the same or similar business or industry Maximizing shareholder value is the ultimate goal of profit making companies ROIC (Profitability) = Return On Invested Capital = Net profit / capital invested = Net income after tax / (equity + debt to creditors) Competitive advantage When a company’s profitability is greater than the average of all other companies in the same industry & competing for the same customers Profitability Sustained competitive advantage Growth © Ram Mudambi, Temple University, 2006

Performance in Nonprofit Enterprises Nonprofit entities such as government agencies, universities, and charities: Are not in business to make a profit Should use their resources efficiently and effectively Set performance goals unique to the organization Set strategies to achieve goals and compete with other nonprofits for scarce resources A successful strategy gives potential donors a compelling message as to why they should contribute. © Ram Mudambi, Temple University, 2006

Strategy as a plan Strategy is concerned with ‘draft(ing) the plan of war...shap(ing) the individual campaigns, and within these, decid(ing) on the individual engagements.’ (Von Clausewitz, On War, 1976) Strategy is ‘a complete plan: a plan which specifies what choices (the player) will make in every possible situation.’ (Von Neumann and Morgenstern, Games and Economic Behavior, 1944) ‘Strategy is a unified, comprehensive and integrated plan...designed to ensure that the basic objectives of the enterprise are achieved.’ (Glueck, Business Policy and Strategic Management, 1980) © Ram Mudambi, Temple University, 2006

Two factors underlying all outcomes Strategy Chance Strategy Outcome Outcome Chance Good strategy Bad strategy Planned Unplanned Planned Unplanned Example: The Battle of Plassey - 1757: Robert Clive and his East India Company troops faced the royal troops of Siraj-ud-Daulah, Nawab of Bengal in the test that would determine the future of English presence in India. Clive sited his cannon under the shelter of trees. The Nawab sited his guns in the open plain. It was the rainy season and there was a sudden downpour just as the battle was joined, that wet the powder for the Nawab’s guns. Clive’s guns, in the shelter of trees were less affected. This difference in foresight was the main reason that the battle was won by the English. © Ram Mudambi, Temple University, 2006

Strategic Planning Rational planning by top management? Basic Strategic Planning Model Defining the Mission and Setting Top-Level Goals External Analysis of Opportunities and Threats Internal Analysis of Strengths and Weaknesses Selection of Appropriate Strategies Implementation of Chosen Strategies © Ram Mudambi, Temple University, 2006 4

The Main Components of the Strategic Planning Process SYLLABUS TOPIC 1 TOPIC 4 External Analysis Competitive Advantage Internal Analysis TOPIC 2 TOPIC 3 TOPIC 5 Contextual Analysis of Strategy TOPIC 6 Corporate Strategy Governance & Ethics Strategy Implementation TOPIC 7 TOPIC 8 © Ram Mudambi, Temple University, 2006

The Main Components of the Strategic Planning Process TEXT © Ram Mudambi, Temple University, 2006

Mission and Goals Mission Major goals - vision Secondary goals Sets out why the organization exists and what it should be doing. Major goals - vision Specify what the organization hopes to fulfill in the medium to long term. Secondary goals Are objectives to be attained that lead to superior performance. © Ram Mudambi, Temple University, 2006

Vision vs. Mission A statement of purpose (strategic intent) committing the organization to ambitious overarching (stretch) goals. Provides a sense of direction and purpose. Drives strategic decision making and resource allocations. Forces the seeking of significant performance improvements to attain goals. © Ram Mudambi, Temple University, 2006

Customer Orientation and Business Definition Abell’s Framework for Defining the Business Consumer-oriented versus Product-oriented business definition Source: Derek F. Abell, Defining the Business: The Starting Point of Strategic Planning (Englewood Cliffs, N.J.: Prentice-Hall, 1980), p. 17. © Ram Mudambi, Temple University, 2006

Values Johnson & Johnson’s credo sets its responsibilities to: J&J product users. J&J employees. Communities in which J&J employees live and work. J&J stockholders. © Ram Mudambi, Temple University, 2006 Source: Courtesy of Johnson & Johnson.

External Analysis Identify strategic opportunities and threats in the operating environment. Immediate (Industry) Macroenvironment National © Ram Mudambi, Temple University, 2006

Internal Analysis Identify strengths Identify weaknesses Quality and quantity of resources available Distinctive competencies Identify weaknesses Inadequate resources Managerial and organizational deficiencies © Ram Mudambi, Temple University, 2006

SWOT and Strategic Choice Strengths and Weaknesses Opportunities and Threats (SWOT Analysis) Strategic Choice Functional Business Global Corporate © Ram Mudambi, Temple University, 2006

Company’s Business Model Management’s model of how strategy will allow the company to gain competitive advantage and achieve superior profitability A business model encompasses how the company will: Select its customers Define and differentiate its product offerings Create value for its customers Acquire and keep customers Produce goods or services Deliver those goods and services to the market Organize activities within the company Configure its resources Achieve and sustain a high level of profitability Grow the business over time © Ram Mudambi, Temple University, 2006

Levels of Strategic Management © Ram Mudambi, Temple University, 2006

Functional-Level Strategies Focus is on improving the effectiveness of operations within a company. Production Operations Marketing Research and development Human resources © Ram Mudambi, Temple University, 2006

Business-Level Strategies Cost leadership Attaining, then using the lowest total cost basis as a competitive advantage. Differentiation Using product features or services to distinguish the firm’s offerings from its competitors. Market niche focus Concentrating competitively on a specific market segment. © Ram Mudambi, Temple University, 2006

Corporate-Level Strategies Vertical integration Outsourcing Diversification Strategic alliances Acquisitions New ventures Business portfolio restructuring © Ram Mudambi, Temple University, 2006

Strategy Implementation Structure Designing organizational structure Designing control systems Market and output controls Bureaucratic controls Control through organizational culture Rewards and incentives Fit - Matching strategy, structure, and controls Congruence among strategy, structure, and controls Controls Strategy © Ram Mudambi, Temple University, 2006

Strategic Leadership Good leaders of the strategy-making process have a number of key attributes: Vision, eloquence, and consistency Commitment Being well informed Willingness to delegate and empower The astute use of power Emotional intelligence Self-awareness Self-regulation Motivation Empathy Social skills © Ram Mudambi, Temple University, 2006

Strategy as an Emergent Process Strategy making in an unpredictable world Creates the necessity for flexible strategic approaches. Strategy making by lower-level managers Strategy evolves through autonomous action. Serendipity and strategy Accidental discoveries and happenstances can have dramatic effects on strategic direction. Intended and emergent strategies Realized strategies are combinations of intended and emergent strategies. Intel is a good example of strategy-making my lower level managers. While the top brass was wedded to memory chips, lower level financial and operations managers saw these chips bleeding red ink and re-allocated resources away from them on a day-to-day basis, so that within a few years, 1983-85, the company was de-facto re-positioned as a logic chip maker. - Gordon Moore © Ram Mudambi, Temple University, 2006 29

Intended and Emergent Strategies Source: Reprinted from “Strategy Formation in an Adhocracy,” by Henry Mintzberg and Alexandra McGugh, published in Administrative Science Quarterly, Vol. 30, No. 2, June 1985, by permission of Administrative Science Quarterly. © Ram Mudambi, Temple University, 2006

The Strategic Management Process for Intended and Emergent Strategies © Ram Mudambi, Temple University, 2006

Strategic Planning in Practice Planning under uncertainty Scenario planning for dynamic environmental change Ivory tower planning Lack of contact with operational realities The importance of involving operating managers Procedural justice in the decision-making process Engagement, explanation, and expectations Planning for the present: Strategic Intent Recognition of the static nature of the strategic fit model Strategic intent in focusing the organization on winning by achieving stretch goals © Ram Mudambi, Temple University, 2006 33

Problems in Strategic Decision Making 1. Cognitive biases systematically influence the rationality of decision makers. Mintzberg’s example of the Vietnam war © Ram Mudambi, Temple University, 2006

Problems in Strategic Decision Making 2. Pitfalls of groupthink Failing to question underlying assumptions. Coalescing around a single person or policy. Filtering out conflicting information. Developing after-the-fact rationalizations. Having an emotional (non-objective) commitment to an action. © Ram Mudambi, Temple University, 2006 34

Techniques for Improving Decision Making Two decision- making processes that counteract cognitive biases and groupthink. © Ram Mudambi, Temple University, 2006

Summary What is strategy and strategic management? Overview of the course Strategic management in the firm Intended and emergent strategies Problems – sources and management © Ram Mudambi, Temple University, 2006