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 Human and Intellectual Capital Prospective Industrial Economies Prospective Resource- based Prospective

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 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: Try to protect the advantage your company has over another company 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.

Balance and reinforcement of activities deters imitators 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: Try to protect the advantage your by slowing down erosion of resources company has over another company 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 Strategy Often 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: Measure success at mobilizing resources (not necessarily value-added) Evaluate effectiveness of employees/ volunteers 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 Business Unit Review Adjustment 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”