1. Overview and Course Summary MGTO650Y: Strategic Management
Dr. Theodore H. K. Clark, MBA, DBA
Associate Professor, Department of Information & Systems Management
The Hong Kong University of Science & Technology
and Adjunct Associate Professor of Operations & Information Management
(Information Economics and Strategy Group)
The Wharton School of the University of Pennsylvania

2. What is Strategy? Strategy versus Tactics
Strategy is when you have time to plan
Time is a luxury many firms may not have
Planning helps firms avoid failures or inefficiency
Doing the right things, not just solving the urgent crisis
Goal of Strategy is to Gain Advantage
Faster growth, higher margins, or both
Alternative is More Work, Resources, or Luck
But, a good strategy can beat superior forces

3. What is Competitive Advantage?
Comparable Advantage - Something you are better at than almost everyone else
Circular slide rule example
Swedish language example
Competitive Advantage - A comparable advantage that MATTERS in your market
Circular slide rule skills irrelevant; use calculator!
Swedish MIGHT matter in some environments
Would Cantonese be a competitive advantage?

4. Porter’s Five Competitive Forces that Drive Industry Profitability
Potential
new entrants
Bargaining power
of suppliers
Industry
competitors
Bargaining power
of buyers
Threats of substitute
products or services

5. Three generic strategies
Strategic Advantage
Uniqueness
Low cost position
Overall Cost
Leadership
Differentiation
Industry
Strategic
Target
Segment
Only
Focus
“Determining the cost/value tradeoff you wish to offer consumers is the
most critical decision” - Porter

6. Porter’s Generic Strategy # 1: Leadership Based on Lower Cost
Become low-cost producer in the industry
Lowest total cost, not just low variable cost
Often driven by economies of scale
Must have parity quality or have lowest cost AFTER adjusting for quality differences
Leveraging scale is common source of advantage in many industries

7. Porter’s Generic Strategy # 2: Differentiation and Segmentation
Differentiation means to make your product unique and (hopefully) more valuable
Becoming hard to copy is critically important
Avoid commodity competition based on price
Differentiation must be worth more to customers than it costs to create
Horizontal differentiation (segmentation) versus vertical differentiation (quality)
Less competition with horizontal differentiation

8. Porter’s Generic Strategy # 3: Focus or Niche Target Market
Can be based on cost, differentiation or both
By targeting a narrow market segment, you may be able to provide targeted products and services to that segment that are both low-cost and differentiated relative to less targeted firms
Strategy is by design differentiated based on segment, as target market segment needs must be unique for focus strategy to work
May be only option open for new entrants

9. Rethinking and Updating Porter’s Generic Strategies Today
Cost leadership and differentiation are often hard to separate or clearly distinguish
Cost leadership adjusted for quality differences
Differentiation relative to differentiation costs
Market leaders generally achieve BOTH
Information goods total cost leadership means highest volumes (or copying)
Differentiation critical to achieving scale
Pricing not uniform, so a new key variable

10. Attackers’ Advantage
Large Business Operations Focus on Meeting the Needs of Traditional Customers
New Products and Services Offer Small Revenues
Cost of Redesigning Existing Processes is High
New Entrants can Focus on Niche Markets
Fast Growing Niche / New Customer Segments
New Products with Higher Initial Cost and Value
Rapid Growth Replaces Traditional Markets
Ignoring New Markets can be VERY Costly!

11. Sustainable Advantage: Part 1
Economies of Scale and Network Externalities
Economies of scale important for E-commerce (e.g., advertising, software development, etc.)
However, network externalities can be even more powerful forces in online business (Metcalf’s Law)
Value of network of relationships increases as a function of the number of people or systems in the network
Fax machines, Telephones, VCRs, VCD, , Internet
Learning effects of scale can also be hard to copy

12. Sustainable Advantage: Part 2
Access to Resources as Source of Advantage
Access to either suppliers or channels of distribution can be a sustainable advantage
Customer switching costs can provide a first mover advantage and can favor established firms
Part of IBM’s continuing advantage is due to cost of software conversion which makes switching difficult
Brand can be viewed as a form of switching cost, but may be overcome with intensive promotion
Scarce expertise may provide lasting advantage

13. Sustainable Advantage: Part 3
Government, Politics, and Options Advantages
Patents, copyright, and trademarks are Government granted Monopoly rights (potentially hard to copy)
Franchises and Licenses, granted by Governments or by Large and Successful Firm, can be hard to copy
Value of owning McDonald’s franchise right can be high
Right to operate Star Ferry may valuable and hard to copy
Government policies on antitrust or prohibitions of monopoly can be source of advantage or disadvantage
Government “grants” may be source of advantage

14. Targeting the New Battleground
Pricing and Versioning can create NEW strategic options that can enable firms to overcome SIZE advantages of dominant firms
Alternative to “Winner Takes All” is smartest firm using customer information most effectively gains competitive advantage.
How can firm with higher operating costs (due to lower scale) WIN with lower prices?

15. Information-Based Pricing Strategy: Profit-Based Market Segmentation
Information about customers enables customized pricing of many services
Pricing based on RISK (Insurance)
Pricing based on VALUE (customized goods)
Pricing based on SAVINGS (industrial goods)
Differential pricing premiums (grocery, clothing, perfume, and many other goods)
Pricing based on PROFITABILITY (targeting)

16. Power of Profitability Gradient
New Entrants Exploit Profitability Gradient
Profitability of all customers is not the same
Historical pricing is not adequately differentiated
Information advantage can yield high profits
100 80 60 40 20
Percentage
of Total
Customers
Percentage of Total Profits

17. Datamining: A Powerful Segmentation Tool, But …
Datamining can only tell you about possible correlation, not drivers of behavior
Driven by past data; future might be different
Correlation not same as causality (coincidence)
Need to look for plausible justification for findings from datamining processes
For example, datamining shows that CEOs are bad customers for credit card companies - WHY?

18. Information-Based Pricing Strategy
Information about customers behavior, preferences, cost-to-serve, and ability to pay can be extremely valuable for ALL products
Datamining is ONE powerful tool that can be used to understand potential opportunities
Correlation but not causality
Data collection in online businesses can be much lower cost than for traditional firms
Valuable and unused data as free byproducts

19. Information Alliances, Outsourcing, and Strategy
Information outsourcing is becoming increasingly common and popular
Information alliances are becoming essential for competitive advantage, especially for network goods to achieve scale for success
Vertical integration initially projected for the new economy is becoming virtual integration
No firm can afford to own all elements of the value chain in today’s complex, global economy
Virtual integration is both efficient and flexible

20. Information Based Organizational Transformation Implementation
Implementing Transformation Strategy
Objective are often unclear or evolving over time
Industry transformation is hard to do top down
Risks and failures can be costly for innovators
Radical Goals, Incremental Change Process
Harvard study of successful Reengineering
P&G channel transformation success case study
Process R&D and Process Prototyping Needed
Infrastructure more than systems; need skills too.

21. Risks and Benefits of Sharing Information
Sharing information even once can result in power shifts that last for years in a relationship (proceed with caution)
However, successful partnerships based on shared information can yield strong mutual benefits and reduce channel inefficiencies
P&G now selling more than 50% of volume using channel information sharing processes
Intel and customers both benefit from shared information to improve efficiency and service

22. Developing Relationships of Trust
Establishing inter-organizational relationships based on trust requires management time and attention
But, management time is one of the most scare assets any firm possesses, especially for senior management
Thus, any firm has a limit on the number of close relationships based on trust which can be sustained

23. Evolution of Trust and Consolidation of Relationships
Limited number of relationships at a high level of trust results consolidation of vendor and customer relationships
Tight partnerships for critical jointly interdependent activities (e.g., JIT)
GM and other firms reducing suppliers
Strategic supply networks and alliances
Leaders in developing trust can gain sustainable competitive advantage

24. Value Chain - Activities
Inbound
Logistics
Operations
Outbound
Marketing &
Sales
Service
Organization
Human resources
Technology
Purchasing
Support
Activities
Primary
From: Porter & Miller, 1985
Idea: Break firm down into manageable pieces for analysis

25. Organizational Planning Given Future Uncertainty and Change
“One thing you can be sure of is that there’s nothing to be sure of”
What about Death and taxes?
Well, maybe not even these, at least in timing
Business implications of new innovations
Consumer behavior and future customer needs almost impossible to predict
Pace of innovation MAY be predictable, but not the fit between innovations and market needs
Copying cheaper than innovating (fast follower wins!)
Getting timing right and moving fast is critical

26. Investments in Business Planning as Future Decision Automation
Traditional business planning process requires firms to make many decisions in advance
Detailed plans and high level approvals
Plan the work, then work the plan
Limits future decisions, which can save time later
However, traditional planning approaches are often criticized as being too inflexible
Automation of management decisions - low cost and better planned, but not responsive to change

27. Benefits and Costs of Investing in Flexibility for Manufacturing
Flexible manufacturing versus Automation
Fast Responsiveness at Low Cost (Goal)
Flexible manufacturing delivers both, but at COST
Automation is low cost at less investment
Manual process is flexible, but high cost
Why not pick either Manual or Automation, depending on what your business needs?
Investments in Flexible Manufacturing can be viewed as creating an option on the future.

28. Investment in Flexible Business Planning: Scenario Planning
Similar to flexible manufacturing, scenario planning creates option value for the future
Traditional planning => factory automation
Entrepreneurial management => manual labor
Scenario planning => flexible manufacturing
This is an INVESTMENT which has a COST
Senior management time required for planning
Management time as a scarce resource
Low probability of high payoff (option investment)

29. Scenario Planning as Strategic Advantage: Shell Oil Example
In mid-1970s, we had lots of data on oil prices, with price always declining over time
However, there were indications of change on the horizon which could change this trend
Most firms thought about this as a risk which was not quantifiable, but did little to plan for possible changes in their environment
Shell Oil created a Scenario Planning model to enable fast response to external change

30. The Scenario Planning Process
Brainstorm to determine most critical dimensions of future uncertainty
Unknown and unknowable uncertainties (consulting study will not help us to resolve this uncertainty)
Important (affect our decisions or ability to succeed)
Limit of two is important due to practical planning limits (but can be relaxed if using for computer simulation models)
Develop scenarios using these dimensions, and develop consistent future model for each scenario
Brainstorm about implications for strategy and investment
Develop ROUGH strategy plans for each scenario
Look for low cost, high payoff investment opportunities

31. Scenario Planning and Simulation can “Create” Value as “Real Options”
Scenario planning for organizations, and the computer extended simulation versions of this for portfolio investments, can create new value
Like options, the investments only pay off occasionally, but can have high payoffs when rapid change occurs
Can be used to enable large firms to react faster, like smaller entrepreneurial firms, to environmental change
Modest investments appropriate, but should not replace traditional processes or tools
Unlike to be marketed by consultants, so may be a source of competitive advantage for firms that become good at using these capabilities

32. Strategic Planning and Change
Strategic planning is generally only needed if there is change or uncertainty in the future
Existing plans are probably adequate if no change
Change is more likely in the future than stability
Key Challenge is Planning with Uncertainty
Predictable change is easier than uncertainty
Changes can be both important and uncertain
Scenario Planning Developed for Uncertainty
Addressing future importance and uncertainty

33. First Step in Change Management is Identifying What to Change
Vision or direction is the starting point for implementing change management
Unfortunately, it may NOT be clear HOW the future will change, so goals are uncertain
Leading change with uncertain goals is difficult and hard to build internal support
Scenarios can be useful ways of identifying areas where new skills may be needed

34. First Step in Scenario Planning is Identifying Key Uncertainties
Look for change areas that are both:
Unknown and unknowable uncertainties (consulting study will not help us to resolve this uncertainty)
Important (affect our decisions or ability to succeed)
Evaluate the level of importance and uncertainty for each area of uncertainty or change identified
Brainstorm to identify as many areas of uncertainties or change as possible at first
Prioritize your list into top 4 themes using above criteria
Consider different challenges for different “businesses”

35. Breakout Session: Small Groups Discuss & Identify Uncertainties
Groups Designed to Encourage Discussion
Not people you work with every day on the job
Not all same level within groups
No HIERARCHY in GROUP, but DEMOCRACY
Not necessarily in group related to current job
Brainstorming ideas used to drive later decision making and models for each group
Build consensus on group discussion focus