HT21 General Management - Week 5 Lecture slides (Pegram Harrison) PDF

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General Management: Competitive Strategy Hilary Term Week 5

Dr Pegram Harrison Adapted from Blackmon (2015) & McKenna (2014)

Session overview

1. Setting the context 2. Defining strategy 3. Three views of strategy A. Positional B. Resource-Based C. Value System

Session overview

1. Setting the context 2. Defining strategy 3. Three views of strategy A. Positional B. Resource-Based C. Value System

Napoleon’s Invasion of Russia

Charles Joseph Minard, 1812 Showing the geographic route of the campaign, the size of Napoleon’s army at each location, and the temperature at each location.

The cautionary tale of Robert McNamara 1916

Born in San Francisco

1937

Receives his MBA from the Harvard Business School at the age of 21

1946

Joins Ford Motor Company

1957

Appointed board member at Ford; Subsequently made President of Ford

1961

Appointed US Secretary of Defense under Presidents Kennedy and Johnson

1968

Appointed President of the World Bank

1981

Retires at the age of 65 http://content.time.com/time/magazine/0,9263,7 601630215,00.html

Robert McNamara was the original ‘Whiz Kid’

CEO of three of the world‘s largest organisations: Ford Motor Company in the 1950s United States Department of Defense in the 1960s The World Bank in the 1970s

Robert McNamara knew every quantitative technique and every important person.

Robert McNamara was the ultimate strategic disaster in practice, if not in theory... At Ford, McNamara focused on copying GM; Ford would lose market share to VW which Ford refused to accept for free as reparations after the Second World War. In Vietnam, McNamara‘s concern with numerical targets (e.g. “confirmed kills”) left him blind to the real war in the field. At the World Bank, McNamara forgot that social programmes don’t generate cash.

The lesson from Robert McNamara‘s failure

Robert McNamara had one of the greatest CVs in history. But his strategies always failed in practice. Practical strategy is crucial in every organisation.

Three purposes of strategy 1) • • • •

Understanding your industry What is the potential for profits? How might you influence industry structure? What is your firm’s position in the industry? How can it manage its relationship with others?

2) Understanding your firm • What gives your firm an advantage over others? • Can you keep it? 3) Understanding the system • How do industry, firm, and environment interact? • How is value generated and allocated?

Session overview

1. Setting the context 2. Defining strategy 3. Three views of strategy A. Positional B. Resource-Based C. Value System

Evolution of strategic management

Corporate strategy (1960s) Chandler Ansoff Andrews

Resourcebased view (1990s) Penrose Wernerfelt Barney Grant Prahalad & Hamel

Strategic planning (1970s) Schendel and Hofer

Strategy consultancy (1950s) McKinsey BCG Bain and Corporate Planning Shell

Industry structure (Industrial economics) (1980s) Porter

Based on Pettigrew, Thomas & Whittington (2002)

What is Strategy, 1? 'The determination of the basic longterm goals and objectives of an enterprise and the adoption of courses of action and the allocation of resources necessary for carrying out these goals’ (Chandler, 1960: 13). Strategic choices include goals, products and service offerings, competitive strategy, diversification, and organisational structure (Rummelt, Schendel & Teece, 1994: 9).

What is Strategy, 2? Long-range planning to meet desired goals (usually creating, sustaining, maintaining profits) Involves significant and often irreversible commitment of resources, within constraints Decision-making to achieve and sustain competitive advantage Strategy about WHAT decisions to make— & more importantly, HOW and WHY to make them

Key Questions

What How Why

Strategy versus tactics ‘Strategic decisions are concerned with the longterm health of the enterprise. Tactical decisions deal more with the day-to-day activities necessary for efficient and smooth operations’ (Chandler, 1962, p.11).

What is competitive advantage and why is it so important? A firm achieves a competitive advantage in a given market whenever it outperforms its competitors (Cool, Costa, & Dierickx 2002). Strategy is about seeking and securing competitive advantage (Montgomery & Porter 1991). “If you don’t have a competitive advantage, don’t compete” (Jack Welch, GE).

Example: General Electric GE’s goals and objectives, from 1995: ‘We are a company intent on getting bigger, not smaller – a company whose only answer to the trendy question, “What do you intend to spin off?" is "cash – and lots of it.”’

Objectives $100 billion turnover 50% of turnover outside the US by the year 2000 At least $6 billion pay-out per annum to shareholders

Jack Welch GE CEO 1981-2001

Jack Welch’s ‘Back of the Envelope’ strategy, 1982

SERVICES Information Construction Nuclear

SUPPORT & VENTURES Semiconductor Trading Calma Etc.

TECHNOLOGY Electronics Medical Materials Aerospace

CORE Lighting Appliances Turbines Motors

OUTSIDE Housewares Air conditioning TV & Audio Cable Mobile Radio Stations Power Delivery

Reproduced from Tichy and Sherman (2005) Control Your Own Destiny or Someone Else Will, HarperBusiness

How did General Electric do? General Electric Annual Report, 1995 General Electric Company 2000 1999 1998 (in millions) Revenues $129,853 $111,630 $100,469 Net Earnings $12,735 $10,717 $9,296 Dividends Declared $5,647 $4,786 $4,081 Per Share (in dollars) Net Earnings $1.27 $1.07 $0.93 Dividends $0.57 $0.49 $0.42 GE ongoing operating margin rate 18.9% 17.8% 16.7%

How is General Electric doing? General Electric Annual Report, 2020 Purpose: We rise to the challenge of building a world that works Total Revenues Net Earnings Per Share Net Earnings Dividends GE ongoing operating margin rate

2020

2019

2000

1999

$

$

$

$

76,619

95,214

129,853

111,630

5,546

(4,912)

12,735

10,717

0.58

(0.62)

1.27

1.07

0.04

0.04

0.57

0.49

10%

2.1%

18.9%

17.8%

Internally-focused versus externally-focused views of strategy

Return on Capital

Community Customers Investors Suppliers Employees

Sales/ Capital

Profit/ Sales

Shareholder View of the Firm  Simpler criteria?  Safer externally?  Same in long-term?

Stakeholder View of the Firm  Responds to complexity?  Managerially safer?  Same in long-term?

Early strategic analysis tools PEST Analysis

SWOT Analysis Internal

Political factors

Economic factors

Strengths

Weaknesses

Positive Social factors

Technological factors

Negative Opportunities

External

Threats

Strategy Guru: Michael Porter Focus on industries that are attractive to be in or enter or Change the balance of competition by: Consolidating players Investing in entry barriers Differentiating products

Michael Porter, Harvard Business School

Porter’s generic strategies, 1 At the level of the business unit, there are just two ways of achieving superior performance, the generic strategies of: Cost leadership Differentiation

Porter’s generic strategies, 2

Porter’s generic strategies, 3 Cost leadership Offer standardized products with broad appeal across multiple customer segments Broad differentiation Offer a range of products distinct from rivals in each segment Focused low-cost Limited range of products, or focus on a particular customer segment, at low cost Niche/focused differentiation Limited range of products, or focus on a particular customer segment, differentiating on quality/service

The generic strategy trap? Porter’s generic strategy: when selling commodities, cut costs; Or sell specialized goods at higher prices…

So, your choice is either to take the market price or charge what you want… On the face, this strategy sounds good, but is anyone ever just low cost or differentiated, in every way? How do you decide the right strategy for the whole firm?

The business value chain model (Porter 1985) Porter’s value chain model suggests that a firm’s discrete activities underpin either low cost or differentiation strategies, rather than the firm as a whole.

It can be used to identify where value is being created for customers.

www.supplychain247.com

Session overview

1. Setting the context 2. Defining strategy 3. Three views of strategy A. Positional B. Resource-Based C. Value System

Three Views of Strategy

Positional: whom are you competing with?

Resource-Based: what have you got to work with?

Value System: what value can you add or gain?

Session overview

1. Setting the context 2. Defining strategy 3. Three views of strategy A. Positional: whom are you competing with? B. Resource-Based C. Value System

Positional View: Industry Structure analysis

The key questions are: Is this a good industry to be in now and in the future? Why is it a good industry and how will this change? How can we manage this change?

The New England ‘whaling industry’ was destroyed by the discovery of petroleum and the development of technologies to refine it into kerosene for domestic and urban lighting

Key framework for positional view: Porter’s Five Forces (1979) Competition Life Cycle Exit Barriers Fixed Costs

Scale Economies Patents/Brands Tariffs/Gov’t

New entrants

Bargaining Power of Customers

Intensity of Rivalry

Bargaining Power of Suppliers

Concentration Sophistication Switching Costs Economies from Integration?

Price/Performance Switching Costs Substitutes Make or Buy?

Concentration Sophistication Switching Costs Economies from Integration?

Difficulties in positional view and industry structure analysis

Technical: Industry definition Different evaluations of key factors (for example: barriers to entry)

Philosophical: Zero-sum arm wrestling Positioning, not management

If industry attractiveness is so crucial to explaining competitiveness, how do we explain the success of the iPhone over its rivals? Apple Software SK Hynix RAM Qualcomm LTE Modem InvenSense 6-axis Gyroscope RF Micro Devices Antenna Switch SanDisk 128 Gb (16 GB) NAND Flash Murata Wi-Fi Module Apple/Dialog Power Management IC Broadcom Touchscreen Controller NXP ARM Cortex-M3 Microcontroller Texas Instruments Touch Transmitter Cirrus Logic Audio Codec

What industry are should we be looking at?!

Industry structure may even inhibit profits “In the first hundred years of the US air travel (1903-2003), the industry made exactly zero cumulative profit” The Financial Times 22 November 2003

“If there had been a capitalist at Kitty Hawk, he should have shot down Wilbur Wright” Warren Buffet Berkshire Hathaway

Given those difficulties…

If profitability doesn’t come automatically from your industry, then how can you achieve extraordinary profits on a regular basis?

Return on investment, 1990s (%) in computers: IBM Compaq Apple Dell

15% 36% 1% 80%

Position is only relative The “positional” view of strategy is all about achieving competitive advantage relative to others in your industry. But competitive advantage, and position, are only relative: • A firm may have excellent profits without competitive advantage • Those profits will be sustainable if others cannot duplicate them • ALSO: a firm can have CA, and generate no profits!

Dr Pegram Harrison

DipOL

41

Session overview

1. Setting the context 2. Defining strategy 3. Three views of strategy A. Positional: whom are you competing with? B. Resource-Based: what have you got to work with? C. Value System

One option is to ask: What are you good at? What is your core competence? Canon’s dream was to become the world’s top camera manufacturer. This required expertise in imaging, microprocessor controls, and optics. These technologies are integrated in Canon’s core products, including engines for imaging systems and optical technologies. They are used in end products such as semiconductor manufacturing equipment, and consumer products including image scanners, copiers, desktop printers, fax machines, and cameras. Prahalad & Hamel (1990) The Core Competence of the Corporation, Harvard Business Review, May-June

http://www.accaglobal.com/

Core Competences • • • •

A bundle of skills, technologies, & other resources Of fundamental customer benefit Competitively unique Gateway to new markets Away from: Toward:

Battling for market position Mastery of capabilities

What are you best at?

Core competencies at General Electric

“GE has successfully transferred competencies between its power generator business and its jet engine business, both of which rely on advanced materials and engineering skills to produce large turbines.” Prahalad & Hamel (1994) Competing for the Future, Harvard Business Press

Positional vs Resource-Based View In the Positional View focus is on the potential for industry profits • Structural factors (such as entry barriers) make some industries more attractive than others • Firms can take some proactive steps to improve industry conditions for profits It’s also important to understand the differences between firms within an industry • Why are some firms more successful than others, • even within the same industry conditions? Dr Pegram Harrison

DipOL

46

Resource Based View of Strategy (RBV) Sustainable competitive advantage comes from: • how you use your unique resources • relative to how others use theirs • “fit” between external conditions and internal resources • what you are best at

Dr Pegram Harrison

OTL

47

A Different View of Strategy

Positional view explains the difference in average profits between industries (A – B)

A B

RBV addresses the variation of profits within an industry (C)

C

Dr Pegram Harrison

DipOL

48

Key RBV frameworks: Jay Barney

VRIN Is it Valued by customers? Will they pay you more than it costs?

Is it Rare? Do your customers fail to find it from your competitors?

Is it Inimitable? Is it something your competitors cannot copy?

Is it Non-substitutable?

Barney, J (1991). Firm resources and sustained competitive advantage. Journal of Management, 17, 99–120. Barney, J, Mike Wright, and David J. Ketchen Jr. (2001) The resourcebased view of the firm: ten years after 1991. Journal of Management 27.6: 625-641.

So that your competitors cannot trump you?

And is it core? Is it at the heart of (nearly) everything you do?

Key RBV frameworks: Margaret Peteraf

Peteraf, Margaret A. "The cornerstones of competitive advantage: a resource‐based view." Strategic management journal 14.3 (1993): 179-191.

Nike versus Adidas Both companies are strong in: Product innovation Marketing Supply chain management and distribution Customer focus

Nike has a strong and consistent brand image (“aggressive”), command of social media, and focus on specific markets.

Session overview

1. Setting the context 2. Defining strategy 3. Three views of strategy A. Positional: whom are you competing with? B. Resource-Based: what have you got to work with? C. Value System: what value can you add or gain?

Strategic Value System

Apple

Other

Apple sustains competitive advantage over its competitors by influencing a whole system of interlocking elements that customers value.

Strategic System: containerization Changes required in: Ships Cranes Harbors Trucks Railroads Labor Finance Insurance IT Education etc.

La Ga Ga

Show me the money in the music industry In 2008 sales of recorded music fell 6% digital downloads rose 50% physical media dropped 10% BUT: concert ticket sales grew by 13% Overall consumer spend on music: up 3% UK Music Industry was worth £3.6bn in 2008, up 4.7% on 2007.

Value Creating System

“Strategy is no longer a matter of positioning a fixed set of activities along a value chain. Increasingly, successful companies do not just add value, they reinvent it. Their focus of strategic analysis is not on the company or even the industry but the value creating system itself, within which different economic actors – suppliers, business partners, allies, customers – work together to co-produce value.” Normann and Ramirez (1993) “Designing Interactive Strategy” Harvard Business Review, July-August

Three Interacting Views of Strategy In all of these examples, competitive advantage is assessed and achieved through the decisions firms make to achieve and sustain competitive advantage, through three interacting perspectives on decision-making: Positional + Resource-Based + Value System

Summary: Three Views of Strategy Positional: whom are you competing with? • Is the industry attractive? • How/Should you enter/defend? • Can you influence/change it? • What changes might you be missing? Resource-Based: what have you got to work with? • Core Competences: skills, technologies, people • Unique? Sustainable? Currently under-utilised? • What are you BEST at? Value System: what value can you add or gain? • Influence the whole value chain • Can you block others from advantage? • Or work with stakeholders to co-produce value

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General Management: Competitive Strategy Week 5 Hilary Term

Dr Pegram Harrison Adapted from Blackmon (2015) & McKenna (2014)...