Chapter 1 (S)What is Strategy?

Kelly Bredensteiner, Reid Christner, Christine Cox, Caitlin Greenwood, and Michele Haynes

Strategy

Strategy is about positioning an organization for competitive advantage.

Known link between a company’s strategic choices and it’s long-term performance

Reflects a company’s clear strategic intent and an understanding of its core competencies and assets

The ultimate goal is long-term, sustainable superior performance

Focus of Strategy

To satisfy customers’ needs and wants better than any other company by creating value

“The value of a particular product or service offering, unless constantly maintained, nourished, and improved, erodes with time.”

Creating a Strategy

Forming a strategy is about creating a long-term vision for the company.

The vision must be flexible on how to achieve the overall competitive strategy due to constant change.

Once the company chooses a direction, they must be willing to adapt to any changes.

Alan Wurtzel of Circuit City- “The number one factor was luck.” From Good to Great

Strategic Evolution

Strategy in companies have evolved over time

Industrial EconomiesProspective

Resource-based

Prospective

Human andIntellectual

CapitalProspective

Strategy Then and Now

Strategic Evolution

Industrial Economies Prospective

Company’s success was based upon environmental issues

Focus was on capturing economic value through positioning

Reactive, not proactive

Prospective changed to resource-based due to globalization and technology

Strategic Evolution

Resource-based Prospective

Main goal was to identify and expand on core competencies within a business

Instead of capturing economic value, businesses were creating it

Companies did this by developing and nurturing key resources and capabilities

Strategic Evolution

Human and Intellectual Capital

Fits with the transition of global commerce to a knowledge-based economy

Scarce knowledge and expertise drive product development

Personal relationships with clients is critical to market responsiveness

Strategy vs. Tactic

Both are necessary to compete with other companies

Tactic:

Doing things better than other companies

Operational effectiveness

Strategic:

Doing things differently than other companies

An example of this is Cirque De Soleil which is discussed in the book Blue Ocean Strategy.

Competitive Strategy

Competitive strategy has two parts:

1) Try to protect the advantage your company has over another company

2) Invest in new areas that can create the company’s next competitive advantage

Trade-Offs

• Unique competitive positioning forces trade-offs in terms of what and what not to do, and creates barriers to imitation

• Dell’s direct sales: made-to order

• Southwest Airlines’ different activities deters imitators since they would have to recreate the entire process to be successful, not just one part.

Value Creation

Balance and reinforcement of activities

deters imitators

Value Creation

• Advantages:

• Create value for shareholders, partners, suppliers, employees, and the community

• Satisfy needs and wants of customers better than the competition

• Problems:

• Customers wants change often

• Value erodes with time unless it is constantly maintained

Value Creation Examples

• A decade ago Dell would offer promotional machines as an effective strategy

• Today customers value a more personalized approach as well as immediate, knowledgeable, local customer service

• Apple has moved to this by offering the Genius Bar in their stores

Competitive Advantage Cycle

Competitive strategy has two main parts:

1) Try to protect the advantage your by slowing down erosion of resources company has over another company

2) Invest in new areas that can create the company’s next competitive advantage

Competitive Advantage Cycle

Strategy: An Ecosystem Perspective

• Increasinglynterdependent world

• Companies succeed and fail as a collective whole

• Boundaries are fluid

• Technology enables growth

Strategy as Alignment

• Strategy aimed to align resources and capabilities with goals

• Strategic Capability Gap

• Differences in competences, skills, and resources between what customers demand and what the organization can deliver

• Maintaining Strategic Focus

• Strategy formulation and implementation is subject to human error, obstruction, and abuse

• Must ensure what is said is done

Flexibility is Key

• Not all strategy is planned

• New technologies can emerge competitors emerge

• “Black Swan” effect: In Nassim Taleb’s book a black swan is an outlier- outside the realm of normal prediction. Ex: Who would have predicted that Lehman Bros would fold?

Multiple Levels of Strategy

Strategic management consists of corporate, business unit, and functional strategies used to guide the long-term future of an organization•Corporate Strategy

Concerned with the types of businesses a firm should compete in and how the overall portfolio should be managed

•Business Unit Strategy

Focused on deciding what product or service to offer, how to create it, and how to get it to the marketplace

•Functional StrategyOften used in a narrow division such as marketing, human resources, or technology

Role of Stakeholders

• A mistake with any stakeholder (partners, suppliers, customers, competitors) can negatively affect company for years

• Stake holders have formal, economic, or political power.

• Influence determined by type of stake• Ownership stake- shareholders, directors

• Economic Stake- creditors, employees, customers, suppliers

• Social Stake– regulatory agencies, charities, community and activist groups

Vision Statement

Statement of the long-term goals that senior level management has set up.

Includes the :

competitive strategy that the company has designed

core competencies needed to reach the company’s goals

Vision Statement cont.

What a vision statement should include:

Strategic guidance

Motivation

Must be clear but not constraining

Meets interests and values of stakeholders, and

Feasible

How to the achieve goals:

Focus on only a few aspects and do well on those, and

Set the company’s goals higher than the resource base and competencies would allow

Vision and Mission

• Vision Statement

• Represents long-range goals for the organization

• Should provide strategic guidance and motivational focus

• Mission Statement

• Documents the purpose for an organizations existence

--Best companies focus on few activities and do them well.

Strategic Intent

Statement that includes:

A focus on a company’s key competitive targets

A set of goals about which competencies need to be developed (From Good to Great: just because it’s your core, does not necessarily mean you are the best in the world at it- hedgehog concept)

What kind of resources to bring in, and

a description of what segment of the market to enter and concentrate on

Stretch or Fit?

• Stretching too far to reach goals or over too long a period, and you may never reach your goals

• If you fit too readily, the bar was not set high enough

Non Profit Sector Strategy

Three measures of Success:

1. Measure success at mobilizing resources (not necessarily value-added)

2. Evaluate effectiveness of employees/ volunteers

3. Assess progress toward fulfilling goals (Ex: Red Cross and Katrina- 1) Are there enough shelters/ supplies? 2) Are volunteers trained, burnt out, etc? 3) Has every one that needs it received basic living essentials?)

Strategy Formulation Process

SWOT Analysis

Steps to Creating a Strategy

Designed around three major questions:

Where are we now?

Evaluate current business, mission, vision, and stakeholders (From Good to Great: Evaluating your people is also key, since the right people are your most valuable asset)

Where do we go?

Designed for the company to explore other strategic alternative other than previous strategies

This is the strategic intent

How do we get there?

What the company needs to do to achieve its strategic goals

Close the capability gap

Planning Cycle• Corporate Review

• Review competitive environment, and corporate guidelines, SWOT analysis

• Business Unit Review

• Corporate asks BUs to update long-term goals and discuss how strategies fit with company’s major priorities and goals

• Adjustment

• BU suggestions are evaluated

• Plan Development and Approval

Evaluating Strategic Options

• Effective strategy produces competitive advantage with above average returns.

• Used to be based on return on investment (ROI), but now it’s widely based on a shareholder value approach (SVA)

• SVA: value created when companies invest capital at returns that exceed the cost of that capital

• EVA: economic value-added measure, after-tax operating profit minus cost of capital

• Each approach has a different definition of value, thus require different strategies

Different Definitions of Value

• SVA: value created when companies invest capital at returns that exceed the cost of that capital

• EVA: economic value-added measure, after-tax operating profit minus cost of capital

• Strategists focus on value delivered to customers, which should be correlated to SVA, but not necessarily Ex: Subprime mortgage market

• Each approach has a different definition of value, thus require different strategies

Different Definitions of Value

• Blue Oceans Strategy:

• Value should not only be based on SVA and CV, but value innovation, where low cost and high value can be presented to the customer, increasing both SVA and CV.

Apple’s Strategy

• Apple’s “Purpose” Statement- flexible

“To make a contribution to the world by making tools for the mind that advances

humankind”

• Steve Jobs- focus on core competencies

• “We do no market research”

• “We do not hire consultants”