1. MKT 250 Strategic Management Mishari Alnahedh

2. LECTURE 1: WHAT IS STRATEGY ?

3. What is Strategy ? Why some companies outperform their competitors?
Mishari Alnahedh
Why some companies outperform their competitors?
Management is about HOW to get things done
Strategy is about WHAT things need to get done

4. What is Strategy ?
Mishari Alnahedh
“The core of strategy is discovering the critical factors in a situation and designing a way of coordinating and focusing actions to deal with those factors.”
- Richard Rumelt – Good Strategy Bad Strategy

5. Definitions of Strategy
What is Strategy ?
Mishari Alnahedh
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

6. Distinguishing strategy from tactics
What is Strategy ?
Mishari Alnahedh
Distinguishing strategy from tactics
Strategy is the overall plan for deploying resources to establish a favorable position
Tactic is a scheme for a specific manoeuvre
Characteristics of strategic decisions
Important
Involve a significant commitment of resources
Not easily reversible
“all men can see the tactics whereby I conquer but what none can see is the strategy out of which great victory is evolved” Sun Tzu
© 2013 Robert M. Grant

7. Definitions of Strategy Strategy is about making choices
What is Strategy ?
Mishari Alnahedh
Definitions of Strategy
“Strategy is about adding value through a mix of resources, capabilities and activities different from those used by competitors in your industry.”
Strategy is about making choices

8. THE INDUSTRY ENVIRONMENT
The Basic Strategy Framework
Mishari Alnahedh
Strategy as a Link Between the Firm and its Environment
THE FIRM
Goals & Values
Resources & Capabilities
Structure & Systems
THE INDUSTRY ENVIRONMENT
Competitors
Customers
Suppliers
STRATEGY
© 2013 Robert M. Grant

9. Government Regulation National/ Int’l Economies
The Basic Strategy Framework
Mishari Alnahedh
Strategy Relates a Business to Itself and its Competitive Environment
Mktg.
Oper.
Strategy
Finance
Acctg.
H.R.
Competitive Environment
Government Regulation
Technology
Industry
Environment
National/ Int’l Economies
Other
Competitors
Related
Industries

10. Task Environment Customers and Markets: - Distributors and end users
Mishari Alnahedh
Customers and Markets:
- Distributors and end users
Competitors:
- Competitors for Markets
- Competitors for Resources
Suppliers:
- Suppliers of physical, human, and – financial resources
Regulatory Groups
- Government
- Unions and special interest groups
Technology
- Rate of Development
- Substitutes - Stage of Product or Industry

11. Two Elements of Strategy
Mishari Alnahedh
INDUSTRY
ATTRACTIVENESS
RATE OF PROFIT ABOVE THE COMPETITIVE LEVEL
Which businesses should we be in?
CORPORATE STRATEGY
How do we make money?
COMPETITIVE ADVANTAGE
How should we compete?
BUSINESS STRATEGY
© 2013 Robert M. Grant

12. Mintzberg’s Critique of Formal Strategic Planning
Strategy Making: Design or Process ?
Mishari Alnahedh
STRATEGY AS DESIGN
STRATEGY AS PROCESS
Planning and rational choice
Many decision makers responding to multitude of external and internal forces
INTENDED STRATEGY
EMERGENT STRATEGY
REALIZED STRATEGY
Mintzberg’s Critique of Formal Strategic Planning
The fallacy of prediction – The future is unknown
The fallacy of detachment – Impossible to divorce formulation from implementation
The fallacy of formalization – Inhibits flexibility, spontaneity, intuition and learning
© 2013 Robert M. Grant

13. The Role of Strategy
Mishari Alnahedh
To Generate and Sustain Value via the Linkages Between Position, Resources, and Organization
Position
Resources
& Capabilities
Organization

14. Positioning Scope of the Firm: The Role of Strategy Geographic Scope
Mishari Alnahedh
Positioning
Scope of the Firm:
Geographic Scope
Choice of businesses (corporate portfolio analysis)
Product Market Positioning within a business
Vertical integration decisions

15. Resources & Capabilities
The Role of Strategy
Mishari Alnahedh
Resources & Capabilities
Tangible Resources
e.g. physical capital
Intangible Resources
e.g. trademarks, “know-how”
Organizational Capabilities
e.g. routines and standard operating procedures
Organization
Structure Formal definition of authority Conflict resolution
Systems Rules, routines, evaluation and rewards
Organizational Capabilities Informal communication, networks, recruitment

16. This Course
Mishari Alnahedh
Concepts and Skills that we will develop for this course in Strategic Management:
Industry Analysis
Firm Analysis - Resources and Capabilities
Business Strategy
Competitive Dynamics
Corporate Strategy
Global Strategy [MKT 250]

17. Strategy analysis helps us to manage complexity.
The Role of Analysis
Mishari Alnahedh
Strategy analysis improves decision processes, but doesn’t give answers.
Strategy analysis assists us to identify and understand the main issues.
Strategy analysis helps us to manage complexity.
Strategy analysis can enhance flexibility and innovation by supporting learning.

18. The Wisdom of Choice
Mishari Alnahedh
“ 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

19. Implementing strategy and organizing the firm for strategic success.
What Is Strategic Management About ?
Mishari Alnahedh
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.

20. What Is Strategic Management About ?
Mishari Alnahedh
Sustainable competitive advantage occurs when a firm implements a value-creating strategy of which other companies are unable to duplicate the benefits or find it too costly to imitate.

21. What Is Strategic Management About ?
Mishari Alnahedh
An important basis for sustainable competitive advantage is the development of resources and capabilities.
Core competencies are resources and capabilities (often related to functional-level skills) that serve as a source of competitive advantage for a firm over its rivals.

22. Goals, Values, and Performance

23. Defining the Business  The Starting Point of Strategy
Mission Statement and Goals
Mishari Alnahedh
Defining the Business  The Starting Point of Strategy
Example: Fall of 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”

24. Defining the Business  The Starting Point of Strategy
Mission Statement and Goals
Mishari Alnahedh
Defining the Business  The Starting Point of Strategy
In what industry is each of these firms competing?

25. Mission Statement and Goals
Mishari Alnahedh
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
- Kenneth Andrews The Concept of Corporate Strategy
e.g., 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.”

26. Kodak: “Be the leader in the imaging sector”
Achieving Goals Through Operational Objectives
Mishari Alnahedh
Kodak: “Be the leader in the imaging sector”
Customer Focus
More Rapid new product development
Raise manufacturing quality
Reduce costs
Gain access to critical knowledge through strategic alliances
Benchmarking
Maintain proprietary technology (e.g., silver halide materials technology)

27. The Choice of Goals
Mishari Alnahedh
Fundamental question of the choice of Goals: Planning for what purpose(s) ?
Profitability (net profits)
Efficiency (low costs)
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)
Market Share
Survival (avoid bankruptcy)

28. The Manager’s Role in Balancing Expectations
Mishari Alnahedh
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.

29. The Manager’s Role in Balancing Expectations
Mishari Alnahedh
There are inherent conflicts of goals within the firm. In The Reckoning, David Halberstam documents the hard fought goal disparities between MBAs on Ford Motor Company’s finance staff, who stressed strategies with clear, quantifiable, profit-maximizing prospects, and the engineering-oriented “product” people, who urged an accelerated pace of design improvement and were more inclined to accept added cost to improve product quality.

30. A Key Performance Measure: Sustainable Competitive Advantage
Mishari Alnahedh
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.

31. A Good Strategy is “Coherent.”
Strategic Coherence
Mishari Alnahedh
The First Rule of Strategy :
A Good Strategy is “Coherent.”
Functional pieces of strategy support the whole
Oper.
Strategy
Finance
Acctg.
H.R.
Mktg.

32. Emirates Fly Dubai The Logic of How The Business Fits Together:
Strategic Coherence
Mishari Alnahedh
The Logic of How The Business Fits Together:
Fly Dubai
Emirates
Low Price
Short Routes
Premium Priced
Short, Long, & Int’l
Variety
- No Frills
- Point-to-Point
- One Aircraft (Boeing 737)
- High # of Aircraft per Route
- No Meals
- Flexible/ Lower Staffing
- Hub & Spoke
- Multiple Aircraft
- Low # of Aircraft per Route
- Meals & Services
- Higher Staffing

33. Source: Michael E. Porter “What is Strategy
Source: Michael E. Porter “What is Strategy?” Harvard Business Review, Nov-Dec. 1996

34. So, a good strategy will be coherent and will:
How Do We Measure Performance?
Mishari Alnahedh
So, a good strategy will be coherent and will:
neutralize any threats we face
utilize available opportunities
capitalize on our strengths
avoid or improve upon current weaknesses
Over-capacity higher
But, how do we measure our success in accomplishing those objectives? That is, how do we measure performance?

35. How Do We Measure Performance?
Mishari Alnahedh
“The strategic aim of a business is to earn a return on capital, and if in any particular case the return in the long run is not satisfactory, then the deficiency should be corrected or the activity abandoned for a more favorable one.”
Alfred P. Sloan My Years with General Motors

36. Tradeoff Between Profitability and Growth Rate
Mishari Alnahedh G0 P1 P2
PMAX G1 G2
Growth Rate
Profitability
The positive relationship is due to economies of scale – network effects and size effects. (profitability drivers growth, growth drives profitability)
Beyond the profitability maximum extra efforts to handle additional growth – e.g. based on integrating new staff in large dimensions and handling culture and quality - do rise sharply and reduce overall profitability.
Sustainable Growth Rate (SGR)
Copyright © 1998 by Houghton Mifflin Company. All rights reserved

37. Horizontal Integration
Possible Organizational Growth Strategies
Mishari Alnahedh
International
Concentration
Organizational
Growth
Diversification
Related
Unrelated
Vertical Integration
Backward
Forward
Horizontal Integration
Copyright © 1998 by Prentice Hall, Inc.

38. Economic Profit vs. Accounting Profit
Mishari Alnahedh
While we have said that the objective of strategy is to “create competitive advantage,” specifically we have the goal to maximize economic return.
Static Measures of Performance
Economic Profits
ROA, ROE, ROC

39. How Do We Measure Performance?
Mishari Alnahedh
While we have said that the objective of strategy is to “create competitive advantage,” specifically we have the goal to maximize economic return.
Static Measures of Performance
Economic Profits
ROA, ROE, ROC
Dynamic Measures of Performance
NPV Methods
Capital Market Measures of Performance
Market Value of the Firm
MVA, EVA, & Tobin’s q

40. Max. net present value of free cash flows:
Value Maximization
Mishari Alnahedh
Maximizing the Value of the Firm
Max. net present value of free cash flows:
Where:
V = market value of the firm
Ct = free cash flow in time t
r = weighted average cost of capital

41. Value Maximization
Mishari Alnahedh
How do the World’s Leading Companies Perform Using Different Profitability Measures?
Company
Market Capitalization ($ bn)
Net income ($ bn)
ROS (%)
ROE (%)
ROA (%)
Return to Shareholders
ExxonMobil
354
30.5
15.2
20.7
17.5
10.1
Apple
338
14.0
31.2
29.3
29.0
53.1
PetroChina
226
22.9
10.6
15.3
11.7
-8.4
General Electric
155
11.6
12.7
9.8
18.9
23.9
J.P. Morgan Chase
108
17.4
28.5
9.9
11.8
2.3
Wal-Mart Stores
196
5.9
23.5
14.1
3.2
Volkswagen 64
9.1
7.5
32.9
3.6
123.2
What is wrong with value maximization ?
© 2013 Robert M. Grant

42. Linking Value Drivers to Performance Targets
Mishari Alnahedh
Sales Targets
Order size
Margin
COGS/Sales
Customer Mix
Development Cost/Sales
Sales/Account
Customer Churn Rate
Deficit Prices
Shareholder Value Creation
Cost Per Delivery
ROCE
Maintenance Cost
Inventory Turnover
New Product Development Time
Indirect/Direct Labor
Economic Profit
Capital Turnover
Capacity Utilization
Customer Complaints
Downtime
Cash Turnover
Accounts Payable Time
Accounts Receivable Time
Departments & Teams
CEO
Corporate/Divisional
Functional
© 2013 Robert M. Grant

43. Case Studies
Mishari Alnahedh
Approach
Briefly skim to get a sense of the story, the business situation and the problem.
Read the case thoroughly and carefully review all the facts and information presented.
Decide what the strategic issues and problems are
Analyze the case using strategic analysis techniques, quantitative analyses, and business judgment
Support your diagnosis and recommendations with reasons, logic and evidence.
Provide solutions or recommendations for the next step

44. Case: Starbucks Corporation, April 2012
NEXT CLASS !
Mishari Alnahedh
Case: Starbucks Corporation, April 2012
Think carefully about what “Strategy” is all about.
Check the Starbuck’s case guide on my website