Chapter 1 Introducing Strategic Management

LEARNING OBJECTIVES 1. Understand what a strategy is and identify the difference between business-level and corporate-level strategy. 2. Understand why we study strategic management. 3. Understand the relationship between strategy formulation and implementation. 4. Describe the determinants of competitive advantage. 5. Recognize the difference between a fundamental view and the dynamic view of competitive advantage.

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 for a firm to be 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

What is Strategic Management?   What is Strategic Management? Strategos: “the general’s view” Holistic “big picture” General Lower officer (e.g., supply logistics infantry, heavy armoured vehicles) Tactical details

What is Strategic Management? Why Study Strategy? 1. You will be more effective in carrying out the general manager’s plans because your functional contributions will fit better with those of other functions. 2. You will appreciate why strategic leaders do not do what you think is best because they have to make tradeoffs in pursuit of what is best for the company. This makes you more understanding of the roles of others in the company and more accommodating of their needs.

What is Strategic Management? Strategic Analysis Internal External Strategy Vision and Mission Goals and Objectives Specific targets Arenas Vehicles Differentiators Staging Economic logic Implementation Levers and Strategic Leadership Fundamental organizational purpose Organizational values The coordinated means by which an organization pursues its goals and objectives

What is Strategic Management? 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 Formulation and Implementation Strategy Formulation is the process of deciding what the strategy will be. Strategy Implementation is the process of performing all the activities necessary to make the strategy a reality.

Strategy Formulation and Implementation 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 The Business Strategy Diamond Arenas What will be our speed and sequence of moves? Speed of expansion? Sequence of initiatives? Staging & Pacing Economic logic How will we get there? Internal development? Joint ventures? Licensing/franchising? Alliances? Acquisitions? Vehicles Staging & Pacing 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

Strategy Formulation and Implementation Arenas By arenas, we mean areas in which a company will be active. Decisions about a company’s arenas may encompass its products, services, distribution channels, market segments, geographic areas, technologies, and even stages of the value-creation process. Vehicles Vehicles are the means for participating in targeted arenas. For instance, a company that wants to go international can achieve that objective in different ways.

Strategy Formulation and Implementation Differentiators The company that understands why its customers regularly choose its products or services over those of competitors has identified its differentiators. The output of differentiators can be seen in the features and attributes of a company’s products or services that help it win sales. Staging Staging refers to the timing and pace of strategic moves. Staging choices typically reflect available resources, including cash, human capital, and knowledge.

Strategy Formulation and Implementation Economic Logic Most of the companies you will study are likely to be for-profit companies and so will have earning an economic profit as a key objective.

Strategy Formulation and Implementation The 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

Strategy Formulation and Implementation Framework for Strategy Implementation Implementation levers Organizational structure Systems and processes People and rewards Intended Strategy Realized Strategy Strategic leadership Lever- and resource-allocation decisions Decision support among stakeholders

Strategy Formulation and Implementation Implementation Lever - Organizational Structure Structure is the manner in which responsibilities, tasks, and people are organized. It includes the organization’s authority, hierarchy, units, divisions, and coordinating mechanisms. Key structural questions that managers must consider when implementing a strategy: ■ Is the current structure appropriate for the intended strategy? ■ Are reporting relationships and the delegation of authority set up to execute the strategic plan? ■ Is the organization too centralized (or decentralized) for the strategy?

Strategy Formulation and Implementation Implementation Lever – Systems and Processes Systems and processes are all the organizational processes and procedures that plan, coordinate, and control the work of people in the organization. They include control and incentive systems, resource- allocation procedures, information systems, budgeting, distribution, and so forth.

Strategy Formulation and Implementation Implementation Lever – People and Rewards The people and rewards lever of the model underscores the importance of using all of the organization’s members to implement a strategy. Regardless of the strategy, at the end of the day, the people in the organization will have to implement it. Competitive advantage is generally tied to the company’s human resources.

Strategic Formulation and Implementation Strategic Leadership Strategic leadership plays two critical roles in successful implementation of a strategy: (1) making substantive implementation lever and resource-allocation decisions, and (2) developing and maintaining support for the strategy from key stakeholders.

What is Competitive Advantage?   What is 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?

What is Competitive Advantage? Three Perspectives on 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