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STRATEGIC MANAGEMENT
IMPORTANT Handouts of each seminar!
LECTURE 1. Fundamentals of Strategic Management.
1.1. WHAT IS STRATEGY?
Some statements that we cannot consider as Strategy (flowed concepts of strategy):
- Strategy as aspiration
-Our strategy is to be #1 or #2… -Our strategy is to grow -Our strategy is to be the world leader
- Strategy as action
-Our strategy is to merge… -…to internationalize… -…consolidate industry… -…outsource…
- Strategy as vision
-Our strategy is to meet our customer’s needs… -…to advance technology for mankind…
Growth is not telling you anything about your strategy. It tells you about the objective (our strategy is to be #1).
Do not confuse the aspirations or objective with the strategy.
Others confuse strategy with the action. Again, it is not strategy. These are important activities but are not equal as strategy.
And finally, strategy as a vision: to eliminate, etc. this is the vision of the company, it is important, it informs the strategy but it is not a part of the strategy.
Strategy as theory of how to compete successfully…
Firms have both intended & emergent strategies (Ex: Intel)
Intended I do want to do something, and I develop my strategic plan…
Emergent when you are lucky, I had something intended but this looks better.
One firm’s strategies may not work in all situations
What works in Spain, might not work in China, or vice versa. Is not only the culture, also the institutions, market institutions, laws,…
Past success does not guarantee future success (Ex: Nokia). It is often difficult to change strategy Strategy should give coherence to decisions and actions Managers must exert effective strategic leadership
*Grease payment vs. bribes (?)
Unplanned Actions can Drive Strategy
This was not what they have in mind in the 80s.
Intel case -> shows that you cannot always perfectly plan the future. Even the new thing comes, and you are confident that you might be successful and exploit it, then you must go after it.
The Essence of Strategy
Fundamental Questions in Strategy
1. Why is it that there are differences between firms? Why do firms differ?
Strategy explains you this. There is a strong link within the strategy and the final result.
- Cultural differences between Western firms and Japanese companies
Japanese firms have a very specific organizational firm.
Keiretsus emerged after the WWII. Japan was completely destroyed. There was no financial market that could give me loans.. what do I do? I start a bank with the (yellow ones).
Importance on the long-term relationship. I know that she is reliable, listening much more to my request, I appreciate more the value of the relationship… (why to change to another supplier…)
South Korea’s chaebols are owned by the family.
To understand differences between Japan and South Korea we must understand about the social norms of the society.
- Networks of relationships have powerful effect – keiretsu, guanxi, chaebol,… - Cooperatives (workers owned) are far more common in some EU countries than in another
*What are Keiretsu? Keiretsu is an organizational structure that is comprised of several aspects:
*Be the best. Not necessarily to be original. Typically companies that are the best are usually imitators.
In 1980s Japanese companies were big players, taking market share, good products, car makers, etc. but they were really good at taking companies from other companies and making them better. This was the dominant way for this companies (be the best).
There’s only one who wins, and the one who wins takes all.
Porter talks about operational efficiency, and that is being the best.
*Be unique: what is strategy is, it’s actually about being unique.
Porter talks about strategy, and says strategy is about being different.
This situation is -> I know what makes me different from the others. What is my differentiator factor?
Being different gives you the advantage of standing out of the crowd.
You cannot please everyone! That’s is IMPORTANT to understand.
_- All strategy is based on understanding competition.
- Strategy defines the company’s distinctive approach to competing and the competitive advantages on which it will be based.
- A good competitive strategy is one that creates unique value for a particular set of customers.
- The worst error in strategy is to compete with rivals on the same dimensions
- Strategy starts with thinking the right way about competition. Many managers compete to be “the best”—but this is a dangerous mindset that leads to a destructive, zero-sum competition that no one can win.
- Competing to be unique, on the other hand, is the basis of a sound business strategy that leads to a positive-sum competition with multiple winners._
DIFFERENTIATION is one of the key elements in Strategy. But based on what? In the VALUE created! When we talk about the strategy there are two elements that are important. Creation of the value (what is the value you are creating as a company) and then, who gets this value. That is, Value CREATION + Value APPROPIATION.
Why is it important that you as a company know clearly the value you are creating?
Ex : Scottex commercials. Always appears a dog, poppy. The message of this is clear, the soft of toilet paper. The value that differentiates Scottex from other toilet papers is the softness. The value they are creating as a company for you is softness paper. The same if we talk about a Bezoya bottle -> they are offering a healthier water. And this is their value when comparing with its competitors.
Operational effectiveness is NOT strategy
_- Total quality management. Benchmarking. Time-based competition. Reengineering. Change management. The quest for productivity, quality, and speed has spawned a remarkable number of management tools and techniques.
- The resulting operational improvements have often been dramatic. Yet many companies have failed to translate those gains into sustainable profitability. Simply improving operational effectiveness does not provide a robust competitive advantage because rarely are “best practice” advantages sustainable. Once a company establishes a new best practice, its rivals tend to copy it quickly.
- Strategy is about doing things differently, not simply doing them better than everyone else. And it’s the key to competitive advantage.
- “Operational effectiveness and strategy are both essential to superior performance, which, after all, is the primary goal of any enterprise. But they work in different ways.” (Porter 1996, p. 61)
- “Operational effectiveness means performing similar activities better than rivals perform them.” (Porter 1996, p. 62)_
If I am getting better as something, what would you do as my competitor? You will copy, and try to be better.
If we are talking about Google, why so many people want to work there? There is something that is know, people appreciate how they work, it attracts people to send their CVs. The culture of that organization, it attracts really smart capable people. That Google couldn’t be as it is without them.
Building the culture that Google has on its company takes lot of years.
Strategy is about Value Creation (as already said)
- The fundamental purpose of a company is to CREATE VALUE
*Value is often equated with economic value, which is wrong *There are other aspects of value that need to be accounted for
- The primary goal of a company is superior long-term return on investment; a measure of performance
- Growth is good only if superiority in ROIC is achieved and sustained
*ROIC = Net Operating Profit After Tax (NOPAT)/Invested Capital
_- Managers should also think about setting proper financial goals for the company. Pleasing today’s shareholders is not the right goal. The fundamental goal of a company is superior long-term return on invested capital (ROIC).
- Only if you achieve strong ROIC are you creating true economic value, which says that you can produce a product for a price that’s greater than the cost of making it (including the cost_
Shareholders value = the result of creating economic value
Pleasing today’s shareholders is not the goal!
Stock prices overshoot and undershoot economic values for significant periods of time Strategy over the long-term, however, stock price adjusts to true economic value as financial results are revealed
Competitive Advantage
CA= a firm’s ability to create value in a way that its rivals cannot.
Key Question = how do firms create sustained above-average returns?
We want to be different. Create value that you appreciate. Offer to the customers something that is interesting for them.
Ex: Bezoya has a CA that the other competitors has not.
What is the KEY? I want to keep this advantage as long as possible. We will see which are the key elements so as to have something that is not easy to get through, not get copied.
Three Perspective of CA
Not DYNAMIC!
If you do not have sustained CA then we are getting into these area of dynamic competition. What is key here is that if you as a company force into dynamic competition it is a very nasty game to play. It is hard to play. Your advantages are extremely short term, and some of the competitors can be better than you at any moment.
Foundations of Economic Performance
The idea is that there are industries that are attractive for the companies to enter. I am entering into mobile industry because I can make lot of money.
Industry analysis will tell you how easy/difficult is to make money in that concrete industry.
When we know how easy/difficult is to make money then we move to the relative position. If I am Singapore airlines what are my CA that makes me more profitable than the rest of the industry?
- The fundamental unit of strategic analysis is the industry Defining the relevant industry a company competes in is essential to strategy Five forces is a tool that we often use to perform this analysis - Company economic performance results from 2 distinct causes, and strategy must encompass both (Porter – check – Aula!)
Elements of a Successful Strategy
- A unique value proposition. There is something of my product that it’s only me who provides it, over all the market. Delivering a unique value proposition compared to competitors.
- A distinctive value chain. Choosing how the organization will operate differently to deliver on its value proposition.
- Fit across value chain. Integrating activity choices across the value chain to fit together and reinforce each other.
- Making strategic trade-offs. Making clear tradeoffs, and choosing what not to do. As important as deciding what to do is important to decide what not to do. There are certain things that we will not do (this has to be clear by the company). Ex: I won’t do the connection flights, etc. You cannot please everyone. You have to have clear which segment are your customers.
- Continuity over time. Continuity of strategic direction. The strategy last. But how long? We don’t know. What is the time frame for the strategy? The strategy in general is not something that you will be changing year x year. You can change it when there is a need. So, you do not want frequent changes, but you have to know when you must change it. _- Competitive strategy is about being different.
- It means deliberately choosing a different set of activities to deliver a unique mix of value.
- Consider companies like Southwest Airlines or IKEA, which shook up their industries in the 1980s by doing things in a novel way.
- They essentially rewrote the playbooks for how to run an airline and sell furniture—and carved out long-lasting, unique strategic positions in the marketplace._
YOU ARE ACTUALLY SELECTING ACTIVITIES THAT YOU WILL DO AND WILL GIVE YOU THE CA.
(1)Strategic Positioning
ACTIVITIES The value chain is the activities involved in delivering value to customers. COMPETITIVE ADVANTAGE The activities, and the overall value chain in which activities are embedded, are the basic units of competitive advantage. SET OF CHOICES Strategy is reflected in the set of choices about how the activities in the value chain are configured and linked together.
_- Developed by Michael Porter and used throughout the world for nearly 30 years, the value chain is a powerful tool for disaggregating a company into its strategically relevant activities in order to focus on the sources of competitive advantage, that is, the specific activities that result in higher prices or lower costs.
- A company’s value chain is typically part of a larger value system that includes companies either upstream (suppliers) or downstream (distribution channels), or both. This perspective about how value is created forces managers to consider and see each activity not just as a cost, but as a step that has to add some increment of value to the finished product or service._
(3)Fit across the value chain
- Strategy involves creating “fit” among a company’s activities. Fit has to do with how the activites in the value chain interact and reinforce one another. - Fit drives both CA & sustainability: when activities mutually reinforce each other, competitors can’t easily imitate them - Fit is leveraging what is different to be more different
Ex : Ikea, again (as mentioned before).
- Activity System Map - Activity system maps show how a company’s strategic position is contained in a set of tailored activities designed to deliver it and create value - When using the value chain as a framework, it is important to remember that all the activities in the chain are linked and interdependent. Positioning choices determine not only what to do and how to do it, but also how everything fits together. While operational effectiveness is about achieving excellence in each activity, strategy is about combining activities. - Fit & CA - Sustainable CA arises from the way activities fit & reinforce each other The configuration of one activity increases the competitive value of other activities - The company’s advantage rests in the activity system, not in the parts - Strategic fit reinforces the uniqueness of a company’s strategic position, amplifies tradeoffs, and is difficult to imitate.
- You can enhance uniqueness and amplify trade-offs when activities combine to reinforce your strategic position. If you make premium technology products, like Apple, you become even more distinctive when you offer a sophisticated sales force and a marketing approach that emphasizes specialized customer assistance and support. - Types of Fit
Differentiation of the activities, different configured value chain
Strategy depends on core competencies, critical resources or key success factors strategy is creating FIT among many of a company’s ACTIVITIES
I am different in the value creation, because I am creating this value better than competitors and this leads to CA (sustainable).
- Which needs? - For whom? - At what relative price?
Trade-offs: choosing what you are going to do and what you are not. Choosing between activities. If I have a clear strategy in my head, I will also have clear what my company is not going to do. I cannot please everyone.
Trade-off -> activity. There must be a fit between activities.
If the strategy is working there’s no reason to change it. Intel example -> that someone comes and tell you here is something that it is better for you -> then you can change. You better know the reason why you change the strategy.
- Example: Southwest Airlines _- The whole matters more than any individual part
- Fit among activities substantially reduces cost, or raises differentiation
- Fit is fundamental both to competitive advantage and sustainability
- Positions built on activity systems are far more sustainable than those built on individual activities: *Harder for a rival to match the whole system than to imitate one feature, product or service *Difficult to discern higher order fit from outside the company *Achieving fit is organizationally difficult
- Competing with activity systems increases the tradeoffs between positions - the tighter the fit, the greater the tradeoffs_
- The example of Southwest Airlines is provided to understanding the tradeoffs made in the value chain activities. By pruning the number of activitiesthey perform and by performing others in nontraditional ways, the value chain of Southwest Airlines is fundamentally different from those of most other airlines. And their competitors are not able to easily imitate them without making major sacrifices in their own value chain activities
(5) Continuity over Time
- Continuity of Strategic Direction
Strategy is about making choices. The hardest thing for many companies is sticking to those choices over time, even in the face of intense competition and challenging economic times.
Deeping a strategic position involves making the company’s activities more distinctive, strengthening fit, and communicating the strategy better to those customers who should value it – not chasing after “easy” growth opportunities that dilute the company’s value proposition.
- Continuous Improvement
*”Reinvention” and frequent shifts in direction are costly and confuse the customer, the industry & the organization.
*Continuity of strategy is essential to creating & sustaining competitive advantage. This means:
- understanding the strategy throughout the organization
- building truly unique skills and assets related to the strategy
- establishing a clear identity with customers, channels and vendors.
*Does this mean a company should never change? No. Innovation & growth ensure success. However, the value proposition stays the same. The job of management is to continuously improve how to realize it.
- Strategic Mindset
Competitive success arises from maintaining flexibility, adapting to hypercompetition and constantly transforming the industry. CA depends on the discipline to pursue a distinctive strategy consistently over time , while continuously improving operational effectiveness.
So… WHAT IS A STRATEGY?
Strategy = (Porter) involves defining a company’s long term position in the marketplace, making the hard trade-offs about what the company will and will not do to provide value to customers, and forging hard-to-replicate fit among parts of the “activity system” the firm constructs to deliver value to customers, all with a view to making a superior return on investment.
The goal of strategy is to achieve a “superior long-term ROI”. “Economic Value is created when customers are willing to pay a price for a product or service that exceeds the cost of producing it”. Competitive strategy is about being different.
1.2. STRATEGIC MANAGEMENT
What is the relation between Strategic Management vs. Strategy?
- The Study of Strategic Management
Strategic Management = set of managerial decisions & actions that determines the long-run performance of a corporation. Includes:
a) Internal and external environment scanning b) Strategy formulation c) Strategy implementation d) Evaluation + control
You have to do the analysis of the environment (macro + micro) to be able to formulate strategy.
Strategy Implementation -> you have to measure it: how well you are doing, control it and then make the adjustments needed.
Although it is a linear process -> iterative nature of the Strategic Management process
_- Business strategy - Competitive advantage is won or lost at the business unit level. To achieve competitive advantage, companies must position themselves strategically within their industries.
- The terms “business unit strategy,” “business strategy” and “competitive strategy” are often used interchangeably in Porter's work.
- Corporate strategy - In diversified companies, corporate leaders can enhance competitive advantage by capturing synergies across business units within the corporate portfolio.
- Functional strategies – e.g., marketing strategy, HR strategy, etc.
- Corporate strategies – diversified organizations e.g., GE, Siemens, .etc._
- Strategy Implementation:
= the process by which strategies and policies are put into action through the development of:
- Programs - Budgets - Procedures
Policies* = the broad guidelines for decision making that links the formulation of a strategy with its implementation
Goals of Strategy Implementation:
- To make sure strategy formulation is comprehensive and well informed - To translate good ideas into actions that can be executed (and sometimes to use execution to generate or identify good ideas)
- Evaluation + Control
= the process in which corporate activities and performance results are monitored so that actual performance can be compared to desired performance
Performance – the end result of organizational activities
Feedback/Learning Process – revise or correct decisions based on performance
- Strategy Decision Making Process
1.3. MISSION, VISION, VALUES, GOALS & OBJECTIVES
- Strategic Plan Hierarchy
Difference between vision vs. mission ->
Mission : present – where are we now, why the company is created
= enduring statement of purpose that distinguishes one organization form other similar enterprises =mission statement is a declaration of an organization’s “reason of being” = Peter Drucker says that asking the question, What is our business? is synonymous with asking the question, what is our mission? Lots of benefits of a mission statement:
- Ensures unanimity of purpose 2. Provides a basis for allocating resources 3. Establishes a general tone, culture or climate 4. Gets employees to identify with the purpose and direction 5. Clearly specifies the organizations purpose 6. Enables the translation of these purposes into objectives 7. Facilitate the translation of objectives into a work activities
Vision : future – what we would like to be? Or want to achieve? It has to be ambitious (hard to achieve) and ambiguous (not very clear, expressing more than one possible meaning).
= a simple statement or understanding of what the firm will be in the future
C. Implement plan and assess after one year
(+) Examples
Ex: PepsiCo – applying the criteria (+)
Allows you to think on the structure & the elements your mission statement should cover when doing this analysis. Statement lacks…
Values - Values are important in Strategy -> what we believe in. Declared values = what I am telling vs. How I am behaving (?)
Organizational Values
= values are the foundation for vision
=values are the essence of a company’s philosophy for achieving success
=they are the bedrock of corporate culture
=Organizational values questions:
- What do we stand for? - How do we treat our employees and customers? - What are our core values? - How do we want to be seen by the community? - What attitudes & behaviors in employees do we want to reward? - Vision’s & Mission’s relation to strategy
Strategic leaders provide the context for the strategy formulation and implementation through modeling vision and mission.
Vision & mission reinforce and support strategy. Conversely, strategy provides a coherent plan for realizing vision and mission.
Vision & mission provide direction but are not strategies in and of themselves.
Vision & mission statements can help guide important decisions on strategic tradeoff issues by addressing core values that should guide long-term decisions.
Vision & mission convey organizational identity and purpose to stakeholders.
IMP. • Vision and mission statements do not address how the company will achieve its objectives Rather, they provide a directional and moral compass to guide decision-making and actions
_- Strategies are more concrete plans about how objectives will be achieved • Thus, vision and mission statements may seem a bit ambiguous, while a high quality strategy will provide more definitive direction
- Why Vision and Mission Statements Are_ Not Substitutes for Strategy - Vision and mission can be powerful tools, but they must be realized through carefully crafted and executed strategy. The mission and vision statements provide focus and then the strategy translates them into action. The vision and mission are spelled out in strategic goals and objectives to direct the organization’s actions. The broad visions of Sony and Citibank both demonstrate that effective visions are ambitious and ambiguous.
PROCESS ANALYSIS OF EXT/INT -> FORMULATION -> IMPLEMENTATION-> performance evaluation + control
1.4. STRATEGY FORMULATION: BUSINESS STRATEGY DIAMOND
- The Business Strategy Diamond
