Introduction to Corporate Strategy By Professor G.S. (Andy) Andrews PhD.

Five Definitions Strategy as… a consciously and purposefully developed plan; a ploy to outmaneuver a competitor; a pattern in a stream of actions, whether intended or not; a position defined either with respect to a competitor, in the context of a number of competitors, or with respect to markets; and as a perspective, i.e. a certain mindset of how to perceive the world. Mintzberg, H. (1987). "The Strategy Concept I: Five Ps For Strategy." California Management Review 30(1) Fall: 11-24.

What is Strategy? A Definition The choice of a future for the company and of a way to reach that future, understood as the framework that coordinates, unifies and integrates the company’s decisions and actions

Another definition…. - Chandler .. .the determination of the basic long term goals and objectives of an enterprise and the adoption of the courses of action and the allocation of resources necessary for carrying out those goals - Chandler

“Strategy is what you have in mind until you get the first blow.” Mike Tyson, heavy weight champion. “No plan survives contact with the enemy” Von Clausewitz –”On War”

Source: Henry Mintzberg Strategy Formation Source: Henry Mintzberg

$199 B $130 B $210 B $174B $243 B $566 B $172B $42 B

What do they have in common? They re-constructured their industries Or re-invented their industries! Through a process of Innovation Led Change! $61 B $101 B $243 B $89 B $21 B

Who created $40 billion of market value right under their noses?

What is Strategy? Choice of a Future Industry Value System Users Customers Competitors Suppliers Implementation Vision & Mission Values Long term Shared Communicated Strategic Decisions Commitment Hard to reverse Firm-specific Aspects Scope Activities Resources and Capabilities

Key Questions for Strategy How do we create value? How do we capture value? How can we sustain this value?

The five major elements of strategy Economic Logic Arenas Staging Differentiators Vehicles Where will we be active? How will we obtain our returns? What will be our speed and sequence of moves? How will we get there? How will we win in the market place? “Are you sure you have a strategy?” Donald C. Hambrick and James W. Frederickson Academy of Management Executive 2001 Vol. 15 No. 4

The five major elements of strategy OMV Strategy & Finance February 2007 The five major elements of strategy Strategy is an integrated set of choices. Arenas Where will we be active? Vehicles How will we get there? Differentiators How will we win in the market place? Staging What will be our speed and sequence of moves? Economic Logic How will we obtain our returns? “Are you sure you have a strategy?” Donald C. Hambrick and James W. Frederickson Academy of Management Executive 2001 Vol. 15 No. 4

What drives competition in the industry? Porter’s Five Forces Threat of new entrants Potential Entrants Suppliers The Industry Buyers Bargaining power of suppliers Competition within the industry Bargaining power of customers / buyers Substitutes The threat of substitue products An industry = the group of companies producing products fulfilling the same customer needs.

The Activity System Value Chain An activity system is an integrated set of value creation processes leading to the supply of product and/ or service offerings. This activity system is frequently referred to as the value chain. (Porter, 1985) “Strategy: Process, Content, Context” 3rd edition De Wit & Meyer Thomson Learning 2004

Key Questions for Strategy - Let us start with the first question.. How do we create value? How do we capture value? How can we sustain this value?

How do you create customer value? Apple 1978 ...an easy-to-use computer to every man, woman and child! Wal-Mart 1962 ...to put good-sized stores into little one-horse towns which everybody else was ignoring... Canon ...to build a low-volume desk-top copier, 50% cheaper than conventional copiers, 10 times as reliable and maintenance free. . . In Star Trek words, being different is… (read) What does being diff mean in real companies? For ex, Apple differed from competitors at the vision level back in 1978 with the idea to create a computer for everyone. Or Wal-Mart differed at the vision level by deciding to serve rural americans with huge stores where they could find anything. Or Cannon… who was serving the copier market before Cannon entered? XEROX. How was XEROX making money? From service to machines that would break down often. Cannon comes in with copiers that were half the price and didn’t break down Bruno ex of how entrl firms get started… I had this vision and my old company didn’t back me up!

Key Questions for Strategy How do we create value? How do we capture value? How can we sustain this value?

How do we determine strategy? Understand the Industry Income Statement Decide what the Firm Can and Will Do External consistency Internal consistency Dynamic consistency

Do we create value? Do we capture value? Value Created willingness to pay costs of providing good or service Value Captured WTP Value Created Value Captured Client Price Value Captured Firm Cost

Position in the Industry affects Results Explains forward integration? Different industries = different structures! Source: McKinsey

What do you look for in an industry? Entry Barriers Users Industry Value System Suppliers Customers Rivalry Substitutes Income Statement Income Statement Firm Results Firm Specific Factors

What do you look for inside? Industry Value System Income Statement Scope Activities Resources & Capabilities Firm Specific External consistency Internal consistency Dynamic consistency Strengths vs weaknesses Opportunities and threats +

Positioning: Scope Product Scope “What do I sell?” Customer Scope “For whom?” Geographical Scope “Where?” Value created: Ind str Positioning: scope: what we do Activities: how we do it R&Cs * customer scope: TO WHOM through certain customers * product scope: WHAT products w/ which we cover user needsdon’t forget them!! Product orientation: what I know how to do Customer orientation: buyer / final user Geographic scope: WHERE 3. Defining the bzn: segmentation  individual customer  ??  aggregate: our own decision KEY: the way we define the bzn shapes the way we think of it (back to product/customer) Q: why is segmentation and bz definition important? Given the scope I’ve chosen: how do I configure activities?: which ones to keep in? Which ones not? How? Selection of the part of the value system that the firm internalizes (make or buy)

Competitive Positioning Buyer value generated (willingness to pay) Costs incurred (including opportunity cost of capital) Successful differentiated competitor Competitor with dual advantage Successful low-cost competitor Industry average competitor Source: Ghemawat (2006)

Key Questions for Strategy How do we create value? How do we capture value? How can we sustain this value?

What are Resources and Capabilities? Intangible Technology Reputation Patents Tangible Physical Financial Organizational Knowledge Integration Motivation

Apple Computer 1986 1987 1988 1989 1990 Sales 1902 2661 4071 5284 5558 Cost of sales 891 1296 1991 2695 2606 I+D 128 192 273 421 478 Operating income 274 371 620 634 712 Net Income 154 218 400 454 475 ROS 8,10% 8,19% 9,83% 8,59% 8,55% ROA 13,28% 14,75% 19,21% 16.55% 15,96% ROE 28% 28% 44% 36% 32%

APPLE loses 700 M. in just one Q in 1996! Q: when do you think these losses were originated? During the years when Apple’s results were excellent (we’ll see this when we discuss the Apple case) This is just one company, but let’s look at the aggregate

1996

2000

Strategy is about the choices you make… Thank you!!