Corporate Strategy Todd Zenger

The Challenge of Growth Why is growth strategically important?

Classic view of strategy How do firms position themselves to capture and maintain profit streams? Profit Time A “successful” strategy yields a recurring profit stream. Strategy 4

Searching for a valuable position Choosing a desired position and configuring a strategy to attain it.

Southwest Airlines’ Activity System Limited passenger amenities Short-haul, point-to-point routes between midsize cities and secondary airports High aircraft utilization Frequent, reliable departures Lean, highly productive ground and gate crews Very low ticket prices No meals No seat assignments No baggage transfers No connections with other airlines 15-minute gate turnarounds Limited use of travel agents Automatic ticketing machines Standardized fleet of 737 Flexible union contracts High level of employee stock ownership “Southwest, the low-fare airline” compensation of employees Source: Michael E. Porter “What is Strategy” Harvard Business Review, Nov-Dec 1996

Searching a complex landscape

Competitive Advantage and Value Creation To create an advantage a firm must configure itself to do something both valuable and unique Test: were the firm to disappear, could a competitor, supplier, or customer replace it perfectly?

Occupying/defending a valuable position

Source of Competitive Advantage Generic Positions Source of Competitive Advantage Cost Leader Differentiation Broad Segment Cost Leadership Differentiation Competitive Scope Narrow Segment F o c u s

Strategy’s Real Goal… Market Value Time

The Reality Competitive advantage ≠ Sustained value creation Market Time Competitive advantage ≠ Sustained value creation Intel, WalMart, Microsoft

Common Examples of Successful Strategy Wal-mart Southwest Airlines Dell Computer Microsoft Intel However…..

Reality of Southwest Airlines

Dell Computer

Learning this Very Difficult Lesson Asked what to do with Apple Computer in 1997, in front of several thousand IT executives, Michael Dell responded: "What would I do? I'd shut it down and give the money back to the shareholders.“ October 6, 1997

Apple vs. Dell Apple’s market cap in 2007 nearly 3 times that of Dell.

Sustaining growth is hard to do Source: HBR, Laurie, Doz, & Sheer (May 2006) Average Annual Growth Rate, GNP Deflated (%) Years before entering Fortune 50 Years after entering Fortune 50 5 4 3 2 1 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 19

The Problem of Growth Strategy Successful companies relentlessly discover new profit streams. Profit Time A “successful” strategy yields increasing profit streams. Strategy 20

What is Value? Concept 1: Discounted present value of future returns

Growth, Cash Flows, and Value Creation time

Growth, Cash Flows, and Value Creation Increase in growth rate time

What is Value? Concept 1: Discounted present value of future returns Concept 2: Market’s perception of the discounted present value of future returns

The tyranny of being valued on expectations Student X Student Y 95% 80% 75% 65% Actual Score Actual Score Expected Score Expected Score From Richard Rumelt, McKinsey Quarterly 25

Dead on Arrival “Efforts to grow blur uniqueness, create compromises, reduce fit, and ultimately undermine competitive advantage. In fact, the growth imperative is hazardous to strategy” – Michael Porter Firms require something more than a position to sustain value creation!

Value creation demands constantly finding new sources of value Strategy 5 Strategy 4 Strategy 3 Strategy 2 Strategy 1 Time 27

The options: 1. 2. 3. Lunch time conversation. $1bill; 20% shareholder return for a decade, reflective of a tremendous strategic position However, apparent that the position had run out of gas. It could no longer support this growth in value. They sought options for a growth platform. Same business -- Global Expansion Expand offerings to same customers Entirely new business They wanted my advice! What I told them is the essence of my message. The firm had a great strategy. They had a competitive advantage. What they lacked was a theory to guide the ongoing selection of strategies that could further value creation. The options: 1. 2. 3.

Constant search for new positions and markets

The Goal Craft an organization constantly in search of new value. The goal is not growth per se, as some growth is value destroying. Create an organization that is effective in relentlessly sustaining profitable growth and in discovering new sources of such growth. Create an organization that is effective in sustaining value creation (through means other than pure Wall Street marketing).

Reflection Exercise What growth options has your organization considered? What has guided its choices? Share with the group. Be prepared to present answers to these questions for your organization?