An Overview of Strategy: Past, Present, and Future James Oldroyd Kellogg Graduate School of...

An Overview of Strategy: Past, Present, and Future

James OldroydKellogg Graduate School of ManagementNorthwestern University

[email protected]

2

Overview of Strategy

Definition and Brief History of Strategy Industry Strategy Firm Strategy Business Unit Strategy Current Trends in Strategy

Business Building Growth Short-term and Long-term

Conclusion

3

Are these Strategies?

“Become a $125 billion company by the year 2000”

(1990)

“Become the company most known for changing

the worldwide poor-quality image of Japanese products” (1950s)

“Crush Adidas” (1960s)

“Become the Harvard of the West” (1940s)

"A PC on every desktop and in every home," to the broader (and, yes,

even more ambitious) "Great software anytime, anyplace and on

any device"

4

Strategy is about being different. It means deliberately choosing a different set of activities to deliver a unique mix of value

What is Strategy?

Merriam Webster Dictionary

Michael Porter

Hamel and Prahalad

Resource-based view

The science and art of military command exercised to meet the enemy in combat under advantageous conditions

The use of valuable, rare, non-substitutable, and appropriable resources and capabilities to

create sustainable advantage

Leverage of core competence to achieve competitive innovation (changing the rules of the game). It as about being different.

5

Strategy as ArtThe Military Analogy

Von Clausewitz view of strategy:

Strategy was not a formula. Detailed planning always failed due to change events, imperfections in execution, and the leadership of the opposition.

Strategy was the art of the broken-field runner; strategy was not a lengthy plan, but an idea that evolved through changing circumstances.

Strategy involved the instinctive savvy of the best generals

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Demand for Strategy and the Rise of Strategy as Science

Single Business Firms

Post WWII

Multi-divisional Firms

New Managerial Problems: What to buy?

What to sell?

How to allocate resources?

How to achieve synergy?

Strategy as an art is no

longer adequate

Intuition and experience alone cannot manage the multi-divisional firm

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Strategy is….

Kenneth Andrews, The Concept of Corporate Strategy” (pp.18-19).

Business DefinitionBusiness Definition

Key Success Factors

Key Success Factors

Core Competencies

Core Competencies

Competitive Analysis

Competitive Analysis

• What Customers groups served?

• What customer needs do you satisfy?

• How might your markets change with time?

• Existing and potential competitors

• SWOT• Unique core

competencies• Assumptions• Future moves

• What do you do well compared to competitors?

• What do you need in the future?

• What really makes the difference between success and failure?

• What will factors will change in the future?

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Three Levels of Business Strategy

FirmFirmBusiness

UnitBusiness

UnitIndustryIndustry

Strategic Advantage

Choose Your Sandbox

Business Definition

Firm Resources

Which Business Units?

Business Unit Boundaries

Managing Cross Business Synergies

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Conclusion

10

Industry Strategy

FirmFirmBusiness

UnitBusiness


Strategic Advantage

Choose Your

Sandbox

Business Definition

Firm Resources




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Average Annual Returns of U.S. Manufacturers 1970-1990

ROE ROAROSDrugs 21.4% 11.8%13.1%Food and Kindred Products 15.2 6.63.9Chemicals and Allied Products 15.1 7.57.2Fabricated Metal Products 12.3 5.73.7Motor Vehicles and Equipment 11.6 5.63.7Textile Mill Products 9.3 4.32.5Iron and Steel 3.9 1.51.3

Source: Anita McGahan, Harvard Business School

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Year2% Industry

18%Corporate

parent4%

Business segment

30%

Transient46%

In the U.S., corporate strategy is typically the icing on the cake, not the cake itself

• Business units must be competitive on their own merits

• …in attractive industries• But the icing can make the decision

difference between a good cake and a bad one

Source: Anita M. McGahan and Michael E. Porter, “How Much Does Industry Matter Really?” Strategic Management Journal, 1997

Year3% Industry

10%Business Group11%

Firm34%

Transient42%

In much of the rest of the world, corporate strategy is more prominent

Membership in a diversified entity has a larger effect on profitability

The effect on profitability is more likely to be positive

U.S.Rest of World

Source: Tarun Khanna and Jan W. Rivkin, “Estimating the Performance Effects of Business Groups in Emerging Markets,” Strategic Management Journal, 2000Countries: Argentina, Brazil, Chile, India, Indonesia, Israel, Mexico, Peru, the Philippines, South Africa, South Korea, Taiwan, Thailand, and Turkey

A Cautionary NotePeople began to notice problems with the industry approach…

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Persistence of Superior Returns by Industry

The Typical cross-country correlation in in dusty profitability is extremely weak

Source: Tarun Khanna, Harvard Business School

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Persistence of superior returns 1980-1989

Source: Geoff Waring, “Industry differences in the persistence of Firm-specific Returns” 1996

Industry

% if above average return retained each

year

% remaining after 10 years

Cigarettes 100 100Soft Drinks 83 14.5Malt beverages 79 9.5Paper Mills 78 8.3Metal Cans 78 8.3Pharaceuticals 72 3.7Toiletries 72 3.7Steel mills 67 1.8Periodicals 67 1.8Aircraft engines 67 1.8Book publishing 64 1.1Cement 64 1.1Bolts 62 0.8Vehicle Parts 59 0.5Cars 59 0.5Aircraft parts 55 0.2Petroleum refining 54 0.2Surgical instruments 54 0.2Radio & TV 53 0.2Mobile homes 53 0.2Meat packing 52 0.1Plastic products 50 0.1Electronic components 48 0.1Process control 46 0Computers 45 0Semiconductors 44 0

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Conclusion

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Firm Strategy

FirmFirm Business Unit

Business Unit

IndustryIndustry

Strategic Advantage

Choose Your Sandbox

Business Definition

Firm Resources




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Value Creation and a Firm’s Positioning

Willingness to Pay

Supplier opportunity cost

Total value

created

Customer

Supplier

Firm

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Value Division

Customer

Supplier

Firm

Willingness to Pay


Cost

Price

Value Captured by Customer

Value Captured by Firm

Value Captured by Supplier

Added Value is the total value created with the firm in the game – total value created without the firm in the game or the value that would be lost to the world if the firm disappeared. A firm cannot capture more

than its added value.

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Examples of Added Value

Dual Advantage

Willingness to Pay

Supplier opportunity

cost

Differentiation

Goldman Sachs

Merrill Lynch

McDonald’sBurger King

Low Cost

Wal-mart

K-mart

Mom and Pop

Store

20Source: Adapted from Treacy and Wiersema, The Discipline of Market Leaders. Perseus Books. 1995

Generic Strategies

Customer Intimacy

Customer Intimacy

Product LeadershipProduct

Leadership

Operational Excellence

Operational Excellence

Faster

Better

Closer

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Value Added and Competitive Advantage

• Added Value - Goal is to drive a wedge between willingness to pay and (supplier opportunity) cost

•Problem: a firm must often incur higher costs to deliver a better product or service

Willingness to Pay


Cost

Price

Value Captured by Customer

Value Captured by

Firm

Value Captured by

Supplier

Value Added

Competitive Advantage

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Strategies for Shaping the Wedge

Value

Price

High

Low

Cost-to-ServiceHighLow

Industry Pressures

Strategic Moves

Value Added Strategy Sony

Segmentation Strategy Mercedes Charles Schwab

Service Innovation DELL

Coca Cola

Process Innovation

Wal-mart

Source: Adapted from “Beating the Commodity Magnet” V. Kasturi Rangan and George Bowman. Harvard Business School Note 1994

Strategic Moves

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Mini-Case: Marketing Strategy at Delta

In the mid 1980s Delta’s market researchers found that customers (particularly business customers) were strongly influenced to choose a particular airline by the airline’s frequent flyer program. Consequently, to motivate customers to choose Delta, they teamed up with American Express (an exclusive arrangement) to offer a special program: customers could receive triple miles if they would fly on Delta and purchase the tickets using the American Express card.

How would you evaluate Delta’s strategy? (Good or bad?)

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Constraints of Strategy

Environment•Pressures

•Constraints•Opportunities

•Stability or Change

Resources•Availability

•Future scarcity

History•Key Events

•Organizational Change

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Conclusion

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Business Unit Strategy

FirmFirmBusiness

UnitBusiness


Strategic Advantage

Choose Your Sandbox

Business Definition

Firm Resources

Which Business Units?Role definition and integration

Business Unit BoundariesExternal and Internal


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HighRelative Share

LowHigh

Market Growth Rate

Low

Cash Cow

Star

DogProblem Child

RelativeShare

Focus on Market Share

Boston Consulting Group Portfolio Model

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Har

vestH

old

Bui

ld

Business Unit Position

High Med Low

Industry Attractivene

ss

Low

M

ed

Hig

h

General Electric Model

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Business Unit Boundaries• Our business are organized around a market and when a market changes the business unit fails.• We miss opportunities that fall between business units.• Our organization is set in stone, it is impossible to change.

Source: Adapted from Kathy Eisenhardt, Stanford, 2002

Common Complaints

• Regard match of business portfolio to markets as temporary• Pay attention to SCALE of businesses as well as focus• Patching executive at multibusiness level• Economies of scale AND agility

Solution

Traditional RV Market Segments Honda Segments

Minivans

Station wagon

Compact sedans

Sport utility vehicle

Odyssey:Shorter than a minivan but bigger than

station wagon

Criteria:Compact-cum-wagon with “Godzilla”

styling

CR-V:Similar to Jeep Cherokee but smaller and built on the Honda Civic platform

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Example –

1994 1996 1998

Large customers Large companies Global enterprises

Small customers Midsize companies

Government and education

Small customers

Large companies

Midsize companies

Federal

State and local

Education

Small companies

Consumers


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Business Unit Synergies• Senior management wants cross-business synergies, but is unsuccessful• Orchestrating collaboration across businesses is a time sink

Common Complaints

• A few temporary collaborations with exceptional payoffs• Manage NUMBER of collaborations, not just focus• Senior managers set context for collaboration, businesses decide• Synergies AND individual business success

Solution

• sharing movie characters across businesses • Selective collaboration (e.g., Disney characters not

shared with Touchstone)• Senior executives set collaborative context (e.g.,

synergy meetings, calendar, synergy managers, training boot camp), but business managers make the choices

• “Key to earning a big return is to replicate knowledge” – John Browne, CEO

• SBUs belong to 1 of 4 peer groups for knowledge exchange, facilitated by electronic yellow pages

• Participation is voluntary and comes out of SBU budget


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Tests of Corporate Synergy

Weak tests:

Does the portfolio outperform a benchmark portfolio of otherwise comparable but focused companies?

Is the business better off as part of the corporation than it would be by itself?

Stronger tests:

Does each business unit within the corporation outperform comparable focused companies?

Is the business better off as part of this corporation than it would be under any other parent or organizational arrangement?

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Definition and brief history of Strategy Industry Strategy Firm Strategy Business Unit Strategy Current Trends in Strategy


Conclusion

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Business Building Imperative

What Percent of Companies will fall out of the S&P 500 by 2020?

Answer = 50%

95 90

50

CORNINGHandsets

Fiber opticsGlobal Services

Percent of Market Capitalization in December 1999 by Newly Created Businesses Within the Companies from 1990-1999.

Source: Adapted from McKinsey and Company, 2002

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The Role of Corporate and The Business Units

Create

Operate

Trade/ destroy

Business Unit’s Primary focus is to operate assets

Corporate primary focus is to create,

exchange, and destroy assets


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Business Building Requires a Shift in Focus

Acquire/develop options on the periphery

Reduce time spent managing operations

Cannibalize/sell developed businesses

Electrical products

Aerospace, aero-engines, materials, technical support

Financial services

1987

Other products

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%100%

Revenue breakdown by business

1977 1997

General Electric’s evolving business portfolio mix

Broadcasting


Operate

Trade/ destroy

CreateMore time

More time

Less time

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Growth as a Strategic Imperative

Wayne Calloway, PepsiCo

(Gertz & Baptista)

No company ever shrank to greatness

Our shareholders want profit

improvement very soon. In the short

term, the only solution is to get rid

of people and assets.”

Fortune 1000 CEO

Every dim-witted idea I see is now dressed

up as a growth initiative.”

Fortune 500 CEOYou can’t save your way to prosperity”

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Some Myths of Growth

1. Growth is common (compound growth for F500 1983-1993, adjusted for inflation, was -.33%)

2. Big companies can’t grow (virtually no correlation between firm size and growth rate)

3. We’re in a “dead industry” (some companies in dead industries have recorded double-digit growth rates)• “If it’s a choice between investing in a good company in a great

industry, or a great company in a lousy industry, I’ll take the great company in the lousy industry any day …It’s the company, stupid.” Peter Lynch

4. Most large company growth is created through acquisition (Nucor, MBNA internal growth; Traveler’s was a sum of a series of acquisitions)

5. Cost cutting sets the stage for growth (only 7% of profitable growers were cost cutters in prior period)

Source: Jeff Dyer, Brigham Young University, 2001

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Alternative Modes of Growth

Internal•Geographic

•Related product

•New opportunities

•Proliferation

•Extension

•New venture

Alliances

•Vertical

•Horizontal

•Non-equity

•Equity

•JV

Acquisition•Vertical

•Horizontal

•Diversification

•Partial

•Takeover

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Short-term Growth

• New businesses suffocate in shadow of legacy ones

• New businesses thrive while traditional businesses languish

• Roadblocks on previously successful growth paths

Common Complaints • Genetic evolution– Traditional businesses (and people) are combined with

new approaches– New businesses refresh traditional ones– Traditional businesses are occasionally re-combined– Multiple growth paths are traveled– Existing businesses are culled

• Old AND new

Solution

• Diversified into high-volume, low-cost, in-store banking outlets with service-training of sales force from theme park companies

• Newly trained salesforce re-vitalized traditional branch network

• Lexus entry into luxury market, built on– Discarded, experimental, midsize, Asian market product platform– New dealerships, brand images, styling, technology– Rearchitected selected engineering features

• Refreshed lower priced name plates with Lexus technology

• Sophisticated combination of mutations, recombinations, and refreshers

• Combined camera skills (optics technology, management of dealers, high-volume assembly) with new copier product

• Combined print engines from copiers with new laser printer product and OEM channel into print engine business

• Refreshed copier business with sophisticated control technology from laser printers

• Recombined dealer management, high-volume assembly, copier and laser printer technology to launch fax machines business


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• Strategic plans are created, then ignored• Strategic plans are wrong• Short-term performance takes priority over future thinking

Long-term Growth Common Complaints

• Probe the future– Wide-variety of low-cost probes

• Manage NUMBER of probes, not just type. More probes, more variety with more uncertainty• Create identity of company, not vision of industry• 15 month intuition, 5 month plan, 5 week schedule

• “You’ve got to experiment…strategy is about buying options…then picking the best ones” – John Browne, CEO

• Drilling experiments on Andrew oil field led to revolutionary horizontal drilling technique

• Limited JV with Safeway to experiment with integrated food and fuel convenience stores

• “You’ve got to make sure you have feelers out to see when things are about to achieve critical mass” - Bill Gates, COB

• Small investments in 3 video compression technologies • Both internal projects and “Blue Sky” projects

• Organic experiments w/futures trading, Market Buzz, AdvisorSource• Alliances w/Goldman Sachs for IPOs, Great West Life for direct life

insurance• In-house futurists

Solution


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Conclusion

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The Synthesis of Strategy

FirmFirmBusiness

UnitBusiness


Strategic Advantage

Choose your sandbox

Business Definition

Firm Resources

Which business units?

Business unit boundaries

Managing cross business synergies

“Strategy is about being different. It means deliberately choosing a different set of activities to deliver a unique mix of value”

Hamel and Prahalad

Merriam Webster dictionary

the science and art of military command exercised to meet the enemy in combat under advantageous conditions

Resource-based view Where does competitive advantage come from? The use of valuable, rare, non-substitutable, and appropriable resources

and capabilities to create monopoly or rents

Michael Porter

Leverage of core competence to achieve competitive innovation (changing the rules of the game)

New Business Model

Downsizing

Network Organizations

Knowledge-based Competition

Country capabilities

Globalization

Re-engineering

Time-base Competition

Core Competencies

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Key Debates in Strategy

Strategy Formulation vs. Strategy Implementation

Can you create sustainable competitive advantage?

Which is most valuable-physical assets or intangibles

Where is the most value created?

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Conclusion: Elements of a Good Strategy

A good strategy includes:

•Customer Needs•Competitive Position•Resources and Capabilities Underlying Strategy•Internal/external Constraints•Levels of Uncertainty

Understanding and Analysis of:

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Strategy and Execution

Strategy

Execution

Doomed to Fail

A Botched Job

Flirting with Disaster

A Good Chance forSuccess

Weak Strong

Weak

Strong

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Leadership Tasks…

Develop Exclusive legal franchises; Patents; Channel Crowding; Causal ambiguity; Learning curve; Buyer

switching costs; Reputation

Recognize the added value of each resource and applying the proper resource in the appropriate way at

the appropriate time.

Recognize which resources will be valuable in the future and building those resources now. Preserving

existing resources.

Source: David Besanko and Anne Gron “Notes on the Resource-based view of the Firm 2000. Kellogg School of Management

Managing Resources

Protecting Resources

Allocating Resources

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The Need for Leadership

"There is nothing which rots morale more quickly and more completely than . . . the feeling that those in authority do not know their own minds."

Lionel Urwick

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Framework for Organizational Diagnosis

1 Vision

2 Strategy

3 Structure4

Decision Support Systems

5Reward Systems

6Human Resource

Systems7

Organization Culture

PERFORMANCESource: Robert Duncan, 1999

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Framework for Organizational Diagnosis

1 Vision

2 Strategy

3 Structure4

Decision Support Systems

5Reward Systems

6Human Resource

Systems

7Organization Culture

PERFORMANCESource: Robert Duncan, 1999

An Overview of Strategy: Past, Present, and Future James Oldroyd Kellogg Graduate School of...

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