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BUS 800: Strategic Management Week 1: Chapter 1 – The Concept of Strategy

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THE ROLE OF STRATEGY IN SUCCESS Four common factors when addressing characteristics of strategy that are conducive to success: 1) Goals that are simple, consistent, and long-term 2) Profound understanding of the competitive environment 3) Objective appraisal of resources 4) Effective implementation A BRIEF HISTORY OF STRATEGY Origins

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Strategy: o Gives direction and purpose o Deploys resources in the most effective manner o Coordinates the decisions made by different individuals “Strategy”: “strategia” in Greek, meaning “Generalship” Military and business strategy share a number of common concepts and principles, the most basic being the distinction between strategy and tactics o Strategy  Overall plan for deploying resources to establish a favourable position o Tactics  Scheme for a specific action Strategic decisions share three common characteristics: 1) They are important 2) They involve a significant commitment of resources 3) They are not easily reversible The Evolution of Business Strategy The evolution of business strategy has been driven more by the practical needs of business than by the development of theory Corporate planning: long-term planning Strategic management was associated with increasing focus on competition as the central characteristic of the business environment and competitive advantage was the primary goal of strategy Resource-based view: rather that firms pursuing similar strategies, emphasis on internal resources and capabilities has encouraged the identification of points of difference from competitors and the design of strategies that will exploit these differences In the face of continuous change and relentless competition, strategy becomes less about building positions of sustained competitive advantage and more about developing the responsiveness and flexibility to create successive temporary advantages STRATEGY TODAY Strategy is a complex, highly contested field of study o Answers at first seem straightforward, can, on deeper inspection raise further questions and forces us to reflect on some things we might have previously taken for granted What is Strategy? Evolution of strategic management o Financial Budgeting  1950-1960 o Corporate Planning  1960-1970 o Strategy as Positioning  1970-1980 o Quest for Competitive Advantage

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 1980-1990 o Strategy for the New Economy  2000 o Strategy in the New Millenium  2009 o Strategy in Turbulent Times  2014 Strategy is the means by which individuals or organizations achieve their objectives Strategy is focused on achieving certain goals; that the critical actions that make up a strategy involve allocation of resources; and that strategy implies some consistency integration, or cohesiveness As the business environment has become more unstable and unpredictable, so strategy has become less concerned with detailed plans and more concerned with the quest for success Distinction made between corporate strategy and business strategy: o Corporate strategy  Defines the scope of the firm in terms of the industries and markets in which it competes o Business strategy  Is concerned with how the firm competes within a particular industry or market The scope of a firm’s business has implications for the sources of competitive advantage, and the nature of a firm’s competitive advantage determines the range of businesses in which it can be successful How Do We Describe a Firm’s Strategy? Where is the firm competing? How is it competing? How Do We Identify a Firm’s Strategy? Strategy is located in three places: 1) In the heads of the chief executive, senior managers, and other members of the organization; 2) In the top management team’s articulations of strategy in speeches and written documents; and 3) In the decisions through which strategy is enacted The game plan should comprise of three definitive components of strategy: 1) Objectives; 2) Scope; and 3) Advantage Explicit and public statements of strategy need to be checked against decisions and actions: o Where is the company investing its money? o What technologies is the company developing? o What new products have been released, major investment projects initiative and/or top management hires made? How is a Strategy Made? Design versus Emergence Intended Strategy o Conceived by top management o Less a product of rational deliberation and more an outcome of negotiation, bargaining, and compromise among the many individuals and groups involved in the process Realized Strategy o The actual strategy that is implemented o Is only partly related to that which was intended Emergent Strategy o The decisions that emerge from the complex processes in which individual managers interpret the intended strategy and adapt to changing external circumstances Strategy making almost always involves a combination of centrally driven rational design and decentralized adaptation Strategy is being continually enacted through decisions that are made by every member of the organization Planned emergence: there is a planned strategy by this strategy is continually enacted through decisions that are made by every member of the organization What Roles Does Strategy Perform?

 Strategies occupy multiple roles within organizations Strategy as Decision Support  Strategy improves decision making in several ways: 1) Simplifies decision making by constraining the range of decision alternatives considered and by acting as a heuristic that reduces the search required 2) The strategy making process permits the knowledge of different individuals to be pooled and integrated 3) Facilitates the use of analytics tools Strategy as a Coordinating Device  Greatest challenge of managing an organization is coordinating the actions of different organizational members  Strategy is a communication device o CEO can communicate identity, goals and positioning to employees  Communication is not enough o For coordination to be enough, buy-in is essential from different groups in the organization is necessary Strategy as a Target  Strategy is forward-looking o Not only to establish direction, but to set aspirations that can motivate and inspire the members of the organization  Strategy should be less about fit and resource allocation and more about stretch and resource leverage Strategy as Animation & Orientation  The most important role of strategy is to animate and orientate individuals within organizations so that they are mobilized, encouraged, and work in concert with each other to achieve focus and direction even if the plan isn’t correct. Strategy: In Whose Interest? Shareholders versus Stakeholders  There are many different groups in an organization all with different agendas, creating multiple goals which may conflict o At the broadest level, all groups intend to create value, but the question of what we mean by value and how it is created remains  Value is found in the meeting of needs or wants and is reflected in willingness to pay  Purpose is not to just create value for customers, but also to extract some of it in the form of profit for the firm  Deciding how much value has been created and how it has been distributed in the absence of monetized values to act as a common denominator is extremely difficult

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STRATEGY: WHOSE INTERESTS SHOULD BE PRIORITIZED United States, Canada, United Kingdom, Australia: o company boards are required to act in the interests of shareholders Continental European Countries: o Companies legally required to take account of the interests of employees, the state, and the enterprise as a whole In practice, the extent to which firms take a narrow (shareholder) or broad (stakeholder) view of their purpose is probably more a matter of pragmatics than arbitrary choice. Profit & Purpose Most successful companies in terms of profits and shareholder value tend to be those that are motivated by factors other than profit Why does the pursuit of profit so often fail to realize its goal? o Profit will only be an effective guide to management action if managers know what determines profit o Lack of corporate motivation The Debate over Corporate Social Responsibility What are a company’s obligations to society as a whole? Free-market economist Milton Friedman declared CSR to be both unethical and undesirable: o Unethical because it involved management spending owner’s money on projects that owners had not approve of; and o Undesirable because it involved corporate executives determining the interests of society  Does this justify support for political groups, for religious movements, for elitist universities?

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Companies are increasingly accepting responsibilities that extend well beyond the immediate interests of their owners The firm as property view (set of assets owned by shareholders) implies that management’s responsibility is to operate in the interests of shareholders The firm as a social entity view ( a community of individuals that is sustained and supported by its relationship with its social, political, economic, and natural environment) implies a responsibility to maintaining the firm within its overall network of relationships and dependencies The successful implementation of sustainability strategies that lower costs or differentiate products or service offerings can contribute to the firm’s competitive advantage Strategic Management of Non-For-Profit Organizations The strategic planning process of not-for-profit needs to be designed so that mission, goals, resource allocation, and performance targets are closely aligned Many tools of strategy implementation are the same for non-profit as they are for-profit Performance in enhanced by aligning strategy with internal strengths in resources and capabilities THE APPROACH TAKEN IN THIS BOOK Narrowing the Focus This textbook narrows our focus by limiting discussions to private sector firms operating in market economies and by assuming that such firms operate in the interests of their owners and by seeking to maximize profits in the long-run The foundations of mainstream strategy lie in analysis of competition and firms’ quests to outperform their rivals Key considerations of assumptions made: 1) Competition erodes profitability  As competition increases, the interests of different stakeholders converge around the goal of survival 2) The market for corporate control  Management teams that fail to maximize the profits of their companies will be replaced by teams that do 3) Convergence of stakeholder interests  There is likely to be more community of interests than conflict of interests among different stakeholders 4) Simplicity  A key problem of the stakeholder approach is that considering multiple goals and specifying tradeoffs between them vastly increases the complexity of decision-making The Basic Framework for Strategy Analysis For a strategy to be successful, it must be consistent with the firm’s external environment and with its internal environment: its goals and values, resources and capabilities, and structure and systems

Week 2 & 3: Chapter 2 – Industry Analysis LECTURE:  Successful Strategy: o Effective Implementation  Simple, consistent, long-term goals  Profound understanding of the competitive environment  Objective appraisal of resources  Reasons why we need a strategic approach: o Continuous competition o Limited resources  The main purpose of strategy: o Making the best choices o Focusing the organization  Every strategy you take must be complementary to the others  Strategic Decisions share 3 common characteristics: 1) They are important 2) They involve a significant commitment of resources 3) They are not easily reversible  Corporate Strategy o Industry Attractiveness: which industries should we be in? o Decided by the board of directors/corporate management  Business Strategy o Competitive Advantage: How should we compete? o For example, how you compete in locomotives or lightbulbs  The Game plan should comprise of three components of strategy: o Objectives o Scope o Advantage  Being successful means creating value  Explicit statements of strategy need to be checked against decisions and actions: o Where is the company investing its money? o What technologies is the company developing? o What new products have been released, major investment projects initiated, and/or top management hires made?  Strategy is not operational effectiveness o Operational Effectiveness  Assimilating, attaining, and extending best practices  Do the same thing better o Strategic Positioning  Creating a unique and sustainable competitive position

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 Do things differently to achieve a different purpose Strategy is about doing the right things o What do we want to accomplish? Where do we want to compete? How will we win? Planning is about doing things right o Putting strategy into action o Creates order and discipline o Supports execution Value is the gap between the cost and the price The Industry Environment o Microeconomic factors  Customers, suppliers, competitors The Remote Environment o Macroeconomic factors  Political: licensing, anti-trust, capital requirements, environmental standards  Economic: growth, employment, disposable income, cyclical factors  Social: demographics, social media, public awareness, social norms, fashion fads, corporate social responsibility  Technological: enabling communication & social media, automation – rapid change, artificial intelligence, additive mfg. (3D printing)  Ecological: environmental protection, CO2 footprint, global warming  Legal: increasingly complex, rules, patents, litigation Industry profits depend on: o The value of the product to customers o The intensity of competition, and o The bargaining power of the producers relative to their suppliers A profitable industry: o Value is created when the price the customer is willing to pay for a product exceeds the costs incurred by the firm Strategic Positioning (Achieving Superior Performance): o Competitive Advantage  Differentiation (higher price): creating superior value is necessary for winning the game  Lower Cost: cost competitiveness is required for staying in the game Defining the Relevant Industry: o Two primary dimensions: 1) Scope of Products & Services  Motor oil example (car vs. heavy equipment & stationary) 2) Geographic Scope  Global  Regional  National  Local Porter’s 5 Forces Model o Industry Competitors: rivalry among existing firms  Suppliers: bargaining power of suppliers  Substitutes: threat of substitutes  Buyers: bargaining power of buyers  Potential entrants: threat of new entrants Five Forces Model Challenges: 1) Defining the industry  Product & geographical scope 2) Choosing the appropriate level of analysis 3) Dealing with other factors 4) Dealing with uncertainty and rapid structural change

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Prerequisites for success: 1) What do customers want? 2) How do firms survive competition?

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FROM ENVIRONMENTAL ANALYSIS TO INDUSTRY ANALYSIS Business Environment: all the external influences that affect a firm’s decisions and performance Environmental Factors can be organized by source (PESTEL analysis) or by proximity (micro and macro environment) Key to effective analysis is distinguishing the vital from the merely important Core of the business environment: 1) Customers 2) Suppliers 3) Competitors THE DETERMINANTS OF INDUSTRY PROFIT: DEMAND & PROFIT Consumer Surplus: the stronger the competition among producers, the more the consumer surplus Producer Surplus: the stronger the competition among producers, the less the producer surplus Profits are determined by: 1) The value of the product to customers 2) The intensity of competition 3) The bargaining power of the producers relative to their suppliers  Industry analysis brings these 3 factors into a single analytical framework

ANALYZING INDUSTRY ATTRACTIVENESS Industry profitability is determined by the systematic influences of the industry’s structure o For example, the pharmaceutical industry produces highly differentiated product protected by patents (forming a monopoly) that are purchased by price-insensitive customers. Whereas the personal computer industry comprises many firms, produces commoditized products, and is squeezed by powerful suppliers  Small markets are often more profitable since they may be dominated by a single firm Porter’s Five Forces of Competition Framework  Horizontal Competition: o Competition from Substitutes o Competition from Entrants o Competition from Established Rivals  Vertical Competition: o Power of Suppliers o Power of Buyers Competition from Substitutes  The price consumers are willing to pay for a product depends, in part, on the availability of substitute products  Travel agencies, newspapers, and telecommunication providers have all suffered damaging competition from Internet-based substitutes The Threat of Entry  If the entry of new firms is unrestricted, the rate of profit will fall o Threat of entry may be sufficient to ensure that established firms keep prices competitive  An industry where no barriers to entry or exit exist are contestable Capital Requirements The capital costs of getting established in the industry can be so large as to discourage all but the largest companies. Economies of Scale In capital-, research-, or advertising-intensive industries, efficiency requires large-scale operation. Entrants are then faced with the decision to: 1) Entering on a small scale and accepting high unit costs, or 2) Entering on a large scale and bearing the costs of underutilized capacity Absolute Cost Advantages 

Established firms may have a unit cost advantage. This often results from the acquisition of low-cost sources of raw materials. Product Differentiation When products are differentiated, established firms possess the advantages of brand recognition and customer loyalty. Access to Channels of Distribution Limited capacity within distribution channels, risk aversion by retailers, and the fixed costs of carrying an additional product may result in retailers being reluctant to carry a new manufacturer’s product. Governmental & Legal Barriers Some industries (cabs, banking, telecommunications, and broadcasting) require a license from a public authority to enter. Retaliation Established firms may retaliate against new entrants and force them out of the industry. The Effectiveness of Barriers to Entry Industries protected by high entry barriers tend to earn above average rates of profit. Barriers may be ineffective against established firms that are diversifying. Rivalry between Established Competitors Concentration The number and size distribution of firms competing within a market contributes to rivalry. Diversity of Competitors The extent to which a group of firms can avoid price competition in favour of collusive pricing practices depends on how similar they are in their origins, objectives, costs, and strategies. Product Differentiation The more similar the offerings, the more willing customers are to switch between firms. Commodity industries are often plagued by price wars and low profits. Excess Capacity & Exit Barriers Unused capacity encourages firms to offer price cuts. Barriers to exit are costs associated with capacity leaving an industry. Cost Conditions: Scale Economies & the Ratio of Fixed to Variable Costs Where fixed costs are high relative to variable costs, firms will take on marginal business at any price that covers variable price. Scale economies may also encourage companies to compete aggressively on price in order to gain the cost benefits of greater volume. Bargaining Power of Buyers  Input Markets: o P...