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What is Strategy

and the StrategicManagement

Process?

1-1Copyright 2008 Pearson Prentice Hall. All rights reserved.

Chapter 1

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The Tools of Strategic Analysis

1-2Copyright 2008 Pearson Prentice Hall. All rights reserved

1984 Profits: $242 Million

Theme Park Operations: 77 percent of profits

Consumer Products: 22 percent of profits

Filmed Entertainment: 1 percent of profits

Walt Disney Company

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Hired Michael Eisner - 1984

1. Increased admission prices at theme parks1984 - $186 m 1989 - $787 m

2. Focused on movie studios (character development)1984 - $2.42 m 1994 - $845 m

3. Diversified into television (ABC), hotels, retail stores,

sport team, cruise line, publishing, consumerproducts, licensing, etc. (Huey & McGowan, 1995)

Walt Disney Company

Market Cap: 1984 = $2 billion 1994 = $28 billion

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Definition of Strategy

Strategy: A firms theory about how to gaincompetitive advantage

Eisners theory may have been:

People will pay a premium price for extraordinary

entertainment. We have the necessary resources tocreate extraordinary entertainment. Therefore, letsredeploy our resources in a different way and offersomething extraordinary to people.

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Mission Objectives

ExternalAnalysis

InternalAnalysis

StrategicChoice

StrategyImplementation

CompetitiveAdvantage

The Strategic Management Process

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Objectives

ExternalAnalysis

InternalAnalysis

Strategic

Choice

Strategy

Implementation

Competitive

Advantage

Mission

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Objectives:

specific, measurable targets

the things a firm needs to do to achieveits mission

should influence other elements in the strategicmanagement process

Example: Steelcons mission & objectives

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External and Internal Analysis

External Analysis

Systematic Examination

of the Environment

Internal Analysis

interest rates

demographics

social trends

technology

human resources

(knowledge) manufacturing

abilities

technology

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Strategic Choice

External

Analysis

Internal

AnalysisStrategicChoice

Business

Level

Corporate

Level

positioninga business

whichbusinesses?

Example:TATA SKY OR Ramdev MasalaCOLGATE & PALMOLIVE INDIA LTD.

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Strategy Implementation

howstrategies are carried out

whowill do what

organizational structure and control

who reports to whom

how does the firm hire, promote, pay, etc.

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A Strategy Is Only As Good As Its Implementation

Strategy Implementation


every strategic choice has strategy implementationimplications

strategy implementation is just as important asstrategy formulation

Example: Gen. Lee at Gettysburg

h l f l

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Competitive Advantage

Definition: the ability to create more economic valuethan competitors

all other elements of the strategic managementprocess are aimed at achieving competitive advantage

Mission Objectives

ExternalAnalysis

Internal

Analysis

StrategicChoice



Th T l f S i A l i

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The Ability to Create More EconomicValue Than Competitors

there must be something different about a firmsoffering vis--vis competitors offerings

if all firms strategies were the same, no firmwould have a competitive advantage

competitive advantage is the result of doingsomething different and/or better than competitors

Th T l f St t i A l i

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Two Types of Difference

1) Preference for the firms output

2) Cost advantage vis--vis competitors

people choose the firms output over others

people are willing to pay a premium

lower costs of production/distribution

Example: IIPM, Kingfisher Airlines, Tata Sky and

BigCinema and CCD

Example: Indigo & Spice Jet Airlines & Maruti etc.


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External

Analysis

InternalAnalysis

StrategicChoice



identify and exploit differences that may leadto competitive advantage

Example: Apples iPod



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Q

P

D

MR

D

ATC

MC

Q

P

(D=MR=Price)

Imperfect Competition Perfect Competition


ATC

MC


Economic Models

Th T ls f St t i An l sis

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Temporary & Sustainable

competition limits the duration of competitiveadvantage in most cases

profits attract competition

competitive advantage typically results in high profits

Therefore,

most competitive advantage is temporary

competitors imitate the advantage or offer

something better


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Temporary & Sustainable

Some competitive advantages are sustainable if:

competitors are unable to imitate the sourceof advantage

no one conceives of a better offering

Of course,

in time, even sustainable competitive advantagemay be lost


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Competitive Parity

the firms offerings are average

people do not have a preference for the firms offering

the firm does not have a cost advantage over others

some things that may lead to competitive parity maystill be critical to success (e.g., telephones)


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Competitive Disadvantage

people may have an aversion to the firms offering

the firm may have a cost disadvantage

a firm may have outdated technology/equipment

a firm may have a negative reputation

Example: Wal-Marts Labor & Location Policies, DishTV, Resell Value of Bajaj, TVS,AIWA etc


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Measuring Competitive Advantage

Superior Economic Performance Is Viewed as

Evidence of Competitive Advantage

it is rather easy to see the evidence ofcompetitive advantage

measuring the source of the advantage per seis typically impossible

its difficult to measure technology


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Two Classes of Measures:

1) Accounting Measures

2) Economic Measures


Measuring Competitive Advantage

ROA, ROS, ROE, etc. that exceed industryaverages

earning a return in excess of the costof capital


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Disadvantage

Parity

Advantage

Below Normal

Normal

Above Normal

Economic Returns

exceeding expectations

meeting expectations

failing expectations


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Competitive Advantage &

The Strategic Management ProcessEmergent vs. Intended Strategies

the strategic management process leads managerstointendedstrategies

However,

conditions often change or new information

becomes available

managers respond and adopt emergentstrategies

Example: Honda Motorcycles


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in the International Setting

Consistent Logic

important questions remain the same, but theanswers may be different

a firm would still ask about social trends, butsocial trends may be moving in different

directions in different markets

culture and infrastructure differences mustbe taken into account throughout the strategicmanagement process


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in the International Setting

Adopting a Global View

many firms explicitly encourage internationalexperience

managers need to learn to think about strategy

in a global context

observed phenomena have different meaningin different parts of the world

you need to know how the competition seesthe world


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Summary

Firms could achieve competitive parity and survive

they would face a flat demand curve

their cost structure would be the industry average

they would need to adapt their strategy overtime just to survive

they would fail if they didnt adapt their strategy


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he ools of Strateg c Analys s



Summary

This course is not about mere survival, it is aboutthrivingachieving competitive advantage

the strategic management process helps managersachieve competitive advantage

competitive advantage depends on differences

strategy is about discovering and exploitingthese differences


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f g y


Q

P

D

MR

D

ATC

MC

Q

P

(D=MR=Price)

ATC

MC


Thriving! Surviving


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Applying Strategy to Your Career

a solid understanding of strategy concepts willhelp set you apart from other job candidates

you can use the process to identify andexploit difference between you and others

you can use the process to determine if youwant to stay with a company


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& Competitive Advantage

Strategy Matters!

success and failure, between mediocrity and excellence

Strategy is often the difference between:

a great manager and average managers

stumbling through life and moving ahead with purpose

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