Economics of Organization Power Point Set #2

The Wisdom of Choice: “To try and fail is at least to learn; to fail to try is to suffer the inestimable loss of what might have been.” Chester Barnard, The Functions of the Executive

What Is Strategic Management About? Understanding how firms create, capture, and sustain competitive advantage. Analyzing strategic business situations and formulating strategic plans. Implementing strategy and organizing the firm for strategic success.

The Role of Strategy In Business is to Generate and Sustain Value via the Linkages Between Position, Resources, and Organization Position Resources & Capabilities Organization

Positioning Scope of the Firm: Geographic Scope Choice of businesses (corporate portfolio analysis) Product Market Positioning within a business Vertical integration decisions

Resources Tangible Resources Intangible Resources e.g., physical capital Intangible Resources e.g., trademarks, “know-how” Organizational Capabilities e.g., routines and standard operating procedures

Organization Structure Systems Processes Formal Definition of authority Conflict Resolution Systems Rules, Routines, Evaluation and rewards Processes Informal communication, networks, recruitment

A Definition of Strategy Strategy (Quinn, 1980): “The pattern or plan that integrates an organization’s major goals, policies, and action sequences into a cohesive whole. A well formulated strategy helps to marshal and allocate an organization’s resources into a unique and viable posture based on its relative internal competencies and shortcomings, anticipated changes in the environment , and contingent moves by intelligent opponents.”

Definitions of Strategy “The term “strategy” is intended to focus on the inter-dependence of the adversaries’ decisions and on their expectations about each other’s behavior.” Thomas Schelling The Strategy of Conflict “Strategy can be defined as the determination of the basic long-term goals and objectives of an enterprise, and the adoption of courses of action and the allocation of resources necessary for carrying out those goals.” Alfred D. Chandler Strategy and Structure

Defining the Business: The Starting Point of Strategy Example: Fall of the Railroads “They let others take customers away from them because they assumed themselves to be in the railroad business rather than in the transportation business. The reason they defined their industry wrong was because they were railroad oriented instead of transport oriented; they were product oriented instead of customer oriented.” Theodore Levitt “Market Myopia”

Mission Statement and Goals It is the function of the top management team to provide the firm’s purpose or “strategic intent.” Chester Barnard The Functions of the Executive Alfred Sloan My Years with General Motors Komatsu ---> “Encircle Caterpillar” Canon ---> “Beat Xerox” Kodak ---> “Be the leader in the imaging sector” Coca Cola ---> “To put a Coke within ‘arms reach’ of every consumer in the world.”

Fundamental question of the choice of Goals: Planning for what purpose(s)? Profitability (net profits) Efficiency (low costs) Market Share Growth (e.g., increase in total assets, sales, etc) Shareholder Wealth (dividends plus stock price appreciation) Utilization of Resources (e.g., ROE, ROI) Reputation Contribution to Stakeholders (e.g., employees, society) Survival (avoid bankruptcy)

The Manager’s role in balancing expectations Business Roundtable: “Balancing the shareholder’s expectations of maximum return against other priorities is one of the fundamental problems confronting corporate management.” Understanding corporate strategy means understanding the competing value claims of multiple stakeholders. Stakeholders are the individuals and groups who can affect, and are affected by, the strategic outcomes achieved and who have enforceable claims on a firm’s performance.

A Key Performance Measure: Sustainable Competitive Advantage For a company, the definition of success is superior economic performance. To achieve superior economic performance, a firm has to create a sustainable competitive advantage (SCA). SCA is achieved by a value-creating strategy that cannot be (easily) duplicated.

Key Drivers of Value Creation and Sustainable Competitive Advantage: Generating economic value can be accomplished through: REVENUE drivers COST drivers RISK drivers

The Levels of Strategy Corporate - General Electric Business - Home Appliances Functional - e.g., Production

Corporate Strategy At the corporate level, value creation can occur if the individual parts of a firm are integrated into a coherent whole. Corporate strategy is the way a company creates value through the configuration and coordination of its multi-market activities.

Summary “Take-aways”: Providing PURPOSE is an important function for the executive. One important purpose is to CREATE VALUE. Value creation can lead to SUSTAINABLE COMPETITIVE ADVANTAGE.