Chapter 1 Introducing Strategic Management

1 OBJECTIVES Understand why we study strategic management Recognize the difference between a fundamental and a dynamic competitive advantage Describe the determinants of competitive advantage Understand the relationship between strategy formulation and implementation Understand what a strategy is and identify the difference between business-level and corporate- level strategy

2 UNDER ARMOUR AT A GLANCE Revenues$17,000$430,000,000 Net Income 0 57,300,000 Equity Value 0 1,800,000,000 Brands and Trademarks Under Armour, HeatGear, ColdGear, AllSeasonGear, LooseGear, Click Clack Kevin Plank’s VisionTo become the world’s #1 performance athletic brand

3 TWO RETAILERS AT A GLANCE SearsWal-Mar t Year founded Stores 1980 Stores Revenues 1980 Revenues 2004 $25,194 million $36,100 million $1,643 million $285,222 million Net profits 1980 Net profits M (2.4% return on sales) 507M (-1.4% return on sales) $55 M(3.3% return on sales) $10,267 M (3.6% return on sales) Market capitalization 1980 Market capitalization 2004 USD 4.8 billion USD 12.2 billion USD 1 billion USD billion

4 THREE OVERARCHING THEMES Implementing a good strategy is at least as important as creating one, yet many managers give too little thought to implementation Strategic leadership is responsible for  making substantive resource allocation decisions and  developing key- stakeholder support of the strategy We need to see a firm’s competitive position, not as a snapshot, but as an ongoing movie Firms and industries are dynamic in nature To succeed, the formulation of a good strategy and its implementa- tion should be inextricably connected Strategic leader- ship is essential if a firm is able to both formulate and imple- ment strategies that create value   

5 STRATEGY General Lower officer (e.g., supply logistics infantry, heavy armored vehicles) Strategos: “the general’s view” Holistic “big picture” Tactical details

6 THE MILITARY ROOTS OF STRATEGY “The individualist without strategy who takes opponents lightly will inevitably become the captive of others.” – Master Sun

7 THE STRATEGIC MANAGEMENT PROCESS Strategic analyses Internal External Vision and mission Fundamental organizational purpose Organizational values Strategy Arenas Vehicles Differentiators Staging Economic logic The central, integrated, externally oriented concept of how a firm will achieve its objectives Implementation levers and Strategic leadership

8 QUESTIONS OF CORPORATE-LEVEL AND BUSINESS-LEVEL STRATEGY Unit of measure ? ? Corporate-level strategy should ask In which markets do we compete today? In which markets do we want to compete tomorrow? How does our ownership of a business ensure its competitiveness today and in the future? How do we compete in this market today? How will we compete in this market in the future? Business-level strategy should ask

9 STRATEGY AND IMPLEMENTATION ITERATE WAL-MART EXAMPLE Strategy: The process of deciding what to do Implementation: The process of performing all the activities necessary to do what has been planned Compete as discount retailer in rural markets Leverage inventory and sourcing systems to be low-cost leader Invest heavily in organizational structure, systems, and processes

10 UNPLANNED ACTIONS CAN DRIVE STRATEGY Intel’s original focus (1970s & 1980s) Design and manufacture of Dynamic, Random- Access Memory Chips (DRAM) Unplanned experimental venture to make microprocessors for Busicom, a Japanese calculator maker Focus on micro- processor segment By 1984, 95% of Intel revenue came from the microprocessor segment

11 BUSINESS STRATEGY DIAMOND Staging Differentiators Economic logic Vehicles Arenas What will be our speed and sequence of moves? –Speed of expansion? –Sequence of initiatives Staging How will returns be obtained? –Lowest costs through scale advantages? –Lowest costs through scope and replication advantages –Premium prices due to unmatchable service? –Premium prices due to proprietary product features? Economic logic How will we get there? –Internal development? –Joint ventures? –Licensing/franchising? –Experimentation? –Acquisitions? Vehicles How will we win? –Image? –Customization? –Price? –Styling? –Product reliability? –Speed to market? Differentiators Where will we be active? ( and with how much emphasis?) –Which product categories? –Which channels? –Which market segments? –Which geographic areas? –Which core technologies –Which value-creation strategies? Arenas

12 JET BLUE STRATEGY Objective To “bring humanity back to air travel” Arenas Low fare commercial air carrier Underserved but over-priced US cities Vehicles Start from scratch and achieve all growth internally (i.e., do not purchase a regional airline) Differentiators High level of service compared to low fare competitors (e.g., leather seating, satellite TV) Strategy Grow from one route between two cities to serving 20 cities in just 3 years Economic logic Secure cost advantage by being willing and able to perform key tasks differently –One type of plan –JFK home base –Secondary location

13 GOALS OF STRATEGY IMPLEMENTATION To make sure strategy formulation is comprehensive and well informed 1 To translate good ideas into actions that can be executed (and sometimes to use execution to generate or identify good ideas) 2

14 IMPORTANCE OF EXECUTION “The important decisions, the decisions that really matter, are strategic... [But] more important and more difficult is to make effective the course of action decided upon.” – Peter Drucker

15 FRAMEWORK FOR STRATEGY IMPLEMENTATION Intended Strategy Realized and Emergent Strategies Key Factors of Strategy Implementation Implementation levers Organizational structure Systems and processes People and rewards Strategic leadership Lever- and resource-allocation decisions Decision support among stakeholders

16 COMPETITIVE ADVANTAGE Competitive Advantage: a Firm’s ability to create value in a way that its rivals cannot Key question: how do Firms create sustained above-average returns?

17 THREE PERSPECTIVES OF COMPETITIVE ADVANTAGE Dynamic Suggests that in dynamic, rapidly changing markets, a firm’s current market position is not an accurate prediction of future performance. Instead, we look at the past for clues about how the firm arrived at its current position and to future trends – both internal and external – in an effort to predict the future landscape Internal Often called the “resource view”, contends that firms are heterogeneous bundles of resources and capabilities and firms with superior resources and capabilities enjoy competitive advantage over other firms. This advantage makes it relatively easier to achieve consistently higher levels of performance External Also called the “positional view”, contends that variations in a firm’s competitive advantage and performance are primarily a function of industry attractiveness. Companies should therefore either (1) position themselves to compete in attractive industries or (2) adopt strategies that will make their current industries more attractive