01 overview strategy concept

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2007 Prof. Dr. Bernd Venohr

Strategic Management

Course Overview and

Strategy Concept

Prof. Dr. Bernd Venohr

Berlin, April 2007

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2 2007 Prof. Dr. Bernd Venohr

Agenda

Introduction to StrategyCourse Overview and Strategy Concept

Economics of Strategy

Shareholder Value

Business Strategy

External EnvironmentInternal Environment

Competitive Positioning

Corporate StrategyDiversification

Mergers & Acquisitions

Global Strategy

Strategy ProcessOrganizational Structure and Control

Strategic Leadership

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3

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1

Agenda

Introduction to Strategy

Course Overview and Strategy Concept

- Course overview

- Definition of strategy and history of strategy concept

- Assignment of case study companies

- Next session


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Learning Objectives

Understand course objectives and design

What is expected from you?

How will we work together?

How you will be graded?

Introduction strategy concept

Key definitions

Framework of Course


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Current Events

Why are Volkswagen and DaimlerChrysler in trouble, whereas BMW and

Toyota are successful?

What is the rationale of Bayer AG buying Schering AG?

Why has BenQ not been able to turn-around the mobile phone division of

Siemens ?


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Returns on Invested Capital vary widely by Industry

Source: A long-term look at ROIC , Bin Jiang and Timothy M. Koller, McKQuartely 2006 Number 1; *ROIC excl.

0 5 10 15 20 25 30

Pharmaceuticals, biote chnology

Househol d, personal products

Software, services

Media

Commercial services, supplies

Semiconductors, semiconductor equipm ent

Health care equ ipme nt, services

Food, beverage, tobacco

Consumer services

Technology hardware, equipment

Automobiles, components

Capital goods

Consume r durable s, apparel

Food, staples retailing

Retailing

MaterialsEnergy

Transportation

Tele communication services

Utilities

1963-2004

1995-2004

Median annual ROIC (%)*

5.66.425th percentile

12.211.1Median

22.217.975th percentile

1995-20041963-2004Total sample


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Returns on invested capital within an industry differsometimes far more dramatic than between sectors

Median annual ROIC1963-2004 (%)*

0 5 10 15 20 25 30 35 40

Pharmaceuticals, bi otechnology

Househol d, personal products

Software, services

Media

Commercial services, supplies

Hea lth care equi pme nt, services

Semiconductors, semiconductor equipm ent

Consumer services

Food, beverage, tobacco

Capital goods

Automobiles, components

Consume r durable s, apparel

Technology hardware, equipment

Retailing

Food, staples retailing

Materials

Energy

Transportation

Tele communication services

Utilities

Source: A long-term look at ROIC , Bin Jiang and Timothy M. Koller, McKinsey Quartely 2006 Number 1;*,excluding goodwill,

25thpercentile

75thpercentile

50thpercentile


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Return on Invested Capital (ROIC) measures thereturn on the investment provided to the companysinvestors (debt and equity investors)

Ratio Analysis

Capital provided by

debt and equity

investors

Net operating profit

less adjusted taxes

ROIC = NOPLAT

Invested Capital


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Research results on long-term company performancemeasured by ROIC

The average US company has returned its cost of capital over

time: median ROIC 10 percent

Historical ROICs can vary widely by industry. These

differences in the way industries perform haven't changed

substantially over time

Intra-industry differences (spread between the top and bottom

quartile of companies) are sometimes far more dramatic than

those among sectors

Source: A long-term look at ROIC, Bin Jiang and Timothy M. KollerMcKinsey Quartely 2006 Number 1; ROIC histories of about 7,000 publicly listed nonfinancial US companies from1963 to 2004. These companies had revenues of more than $200 mil lion in 2003 dollars , adjusted for inflation.


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Course Motivation: Strategy is the study of why some firmsoutperform others over time

Average returns (profits) among industries vary (industry attractiveness)

Returns among companies within industries vary even more

Returns for individual companies vary over time

Why are some industries more attractive than others?

Why are some firms more successful than others?

Why can can certain firms sustain their superior returnsover time while for other firms profits disappear quickly?


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Different industries?

Different times different macroeconomic conditions?

Different competitive positions?

Different levels of operational effectiveness?

Luck?

Other factors.

Why may be differences in the long-run performanceof companies?

All of these matter


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The art of strategy: to find an advantagedcompetitive position in an attractive industry

Lo Hi

Industry attractiveness

Incr

easing

retu

rns

Advantage

Competitive

position

Disadvantage


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My Personal Background

20+ years of experience in the strategy area

MBA Northwestern 1983

Dissertation PIMS-Programme (1987)

13 years at Bain & Company (classic strategy consulting);

Consultant to Partner

5 years at Accenture (Managing Director): venture capital

and corporate development

My personal objectives for this course

teach you the essence of my experience have some fun together: I still enjoy the field after 20 years


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Course Objectives: to provide a set of concepts andtools to analyze the conditions under which a firm candevelop and sustain a superior competitive position

Evaluate a firms strategy

role of Analyst

Recommend future strategic actions

role of Consultant

Manage the strategic direction of a firm

role of Manager

Develop knowledge and skills needed to:


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Course Emphasis

Generalist perspective

Integrative course (drawing on insights from finance, marketing and other

areas)

Broad principles that can be applied across many firms and markets(grounded in basic economics)

Strategic thinking

Uncertainty, ambiguity, complexity

No one best way

Structured problem-solving (frameworks; quantitative and qualitativeevidence to support analysis)

Practice

Strategic thinking as skill rather than a collection of techniques and

concepts

The best way to learn a skill is to practice it (learn how to swim)


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Learning Philosophy

Teach Strategic Thinking

learning concepts, models and tools of strategic analysis

apply these to real situations (case studies)

develop problem structuring and problemsolving skills for messy situations

develop a fact-based approach

Active class work involvement

active listening

value-adding contributions

Teamwork work together in problem structuring and problem solving

learn from each other

appreciating and leveraging differences


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Course Overview: Format

Classes will consist of:

Case analysis and discussions

Lectures

In-class exercises

Required reading and preparation: No prescribed textbook. Main

focus will be applying the strategic frameworks and tools to

practical company situations. There will usually be short practice

assignments for each session based on company cases assigned

to student groups

Electronic copies of lecture slides (concepts, analytical

techniques) are posted on ILIAS


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Course Overview: Format

Classes will consist of:

Case analysis and discussions

Lectures

In-class exercises

Required reading and preparation: No prescribed textbook. Main

focus will be applying the strategic frameworks and tools to

practical company situations.

Electronic copies of lecture slides (concepts, analytical

techniques) are posted on ILIAS


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Course Overview: Grading

Oral One-on-one examination: week from July 2nd to July

7, 2007

Questions will focus on applying frameworks and toolsto practical situations

Intensive preparation through constant application of

frameworks and tools in class


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Grading last semester and lessons learned

Grade distribution from 1.3 5.0

Average grade about 3.0

Those who succeed

show interest in the subject

do weekly assignments

are active in class

Sure road to failure

have no interest

dont do homework

not showing up/doing other things in class


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Other Housekeeping / Questions

Office adress

FHW Berlin - Berlin School of

Economics

Room 518Badensche Str. 50-51

D-10825 Berlin

Phone +49 (0)30 857 89-334

Mobile: +49 (0)177 576 8477

Email: [email protected]

Office hours: by appointment

Suggested course timing

Start and first half session:

10.00 11.30

1 - 2 mini-breaksBreak: 11.30 11.50

Second half session 11.50 13.20

1 - 2 mini-breaks


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1

Agenda



- Course overview



- Next session


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The Etymology of Strategy- Greek origin: 'militarycommander' during the age of Athenian Democracy

strategus a military commander in ancient Athens and a

member of the Council of War

stratos () army

agein () to lead

General meaning today: long term plan of action designed to

achieve a particular goal, as differentiated from tactics or

immediate actions with resources at hand.

Source: Wikepedia, Strategy


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Etymology of Strategy - Sun Tzu, The Art of War

The Art of War (Chinese:; Hanyu Pinyin: SnZBng F; literally "Sun Tzu's Military Strategy") is aChinese military treatise written during the 6th centuryBC by Sun Tzu.

Sun Tzu general who lived in the state of Wu;contemporary of Confucius.

Book composed of 13 chapters, each of which isdevoted to one aspect of warfare (military strategiesand tactics)

One of the most famous studies of strategy; hugeinfluence on both military planning and beyond.

Source: Wikepedia, Sun Tzu; The Art of War (circa 500 B.C.)

Background


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Etymology of Strategy- Sun Tzu (Famous Quotes)

One hundred victories in one hundred battles is not the most skillful.

Seizing the enemy without fighting is the most skillful.

So it is said that if you know your enemies and know yourself, you will not

be imperiled in a hundred battles; if you do not know your enemies but doknow yourself, you will win one and lose one; if you do not know your ene-

mies nor yourself, you will be imperiled in every single battle.

Strategy without tactics is the slowest route to victory. Tactics without

strategy is the noise before defeat.

All men can see these tactics whereby I conquer, but what none can see is

the strategy out of which victory is evolved.

Source: Wikepedia, Sun Tzu; The Art of War (circa 500 B.C.)


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The Etymology of Strategy- von Clausewitz (Background)

Carl Philipp Gottfried von Clausewitz (June 1, 1780 - November16, 1831); Prussian general and influential military theorist

Served as

- field soldier (extensive combat experience againstFrance/Napoleon)

- staff officer (Major-General) with political/military responsibilities

- prominent military educator

Book On War (Vom Kriege)

- translated into every major language

- compilation of his observations following the Napoleonic War- most influential work of military philosophy in the Western world,

introducing systematic philosophical thought into militaryinstruction and operational planning

Source: Wikepedia, Carl von Clausewitz, On War 1832


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The Etymology of Strategy - von Clausewitz (famous quotes)

War is not an independent phenomenon, but the continuation of politicsby different means: war as a rational instrument of national policy.

Decision to wage war "ought" to be rational, based on estimated costs andgains of war.

War "ought" to be instrumental to achieve some goal, never for its own sake;

and also in the sense that strategy and tactics ought to be directed towardsjust one end, namely towards victory.

War "ought" to be national, in the sense that its objective should be toadvance the interests of a national state and that the entire effort of thenation ought to be mobilized in the service of the military objective.

Strategy is concerned with drafting a plan of war shaping the indi-vidual campaigns... versus tactics involve the use of armed forces inthe engagement, strategy [is] the use of engagements for the objectof war

Source: Wikepedia, Carl von Clausewitz, On War 1832; Wikepedia, Philosophy of War


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Strategy concept for business was developed at HarvardBusiness School

First course in business policy offered 1912: integrate knowledge fromfunctional areas like accounting and operations

Search for core issue facing a company to tie together the other

symptoms and problems in a companys situation and provide insightto the needed solution: ..all the messy, unsolved and perhaps undefinedproblems of importance charactising business management weresummarized under the term strategy (Joseph Bower)

Strategy as analytical construct to summarize core issue as the so-called purpose of the firm: to help the practitioner translate the chaos

of events and decisions he faced every day into an orderly way of sizing upthe firms position in its environment (Michael Porter)

Source: Michael Porter, Industrial Organisation ant the evolution of concepts for strategic planning


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Strategy as concept of how a firm was attempting tocompete in its environment, including a choice of goals aswell as key operating policies

Source: Michael Porter, Industrial Organisation and the evolution of concepts for strategic planning

Company

Strengths and

Weaknesses

Economic, Tech-nical andIndustryOpportunities

and Threats

Personal Values

of the Key

Implementers

Broader

Societal

Expections

Aim of strategy: match

internal competencies and

values of a firm to its

external environment

Effective strategy

formulation:

relating the four key

elements

Consistency tests for agood strategy (Fit)

1 2

3 4

The classic Harvard framework


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Famous strategy definitions in business

Chandler, Strategy and Structure (1962):

Strategy is 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 for carrying out these goals

Kenneth Andrews, The Concept of Corporate Strategy (1971):

Strategy is a pattern of objectives, purposes or goals and the major

policies and plans for achieving these goals, stated in such a way as to

define what business the company is in or is to be in and the kind of

company it is or is to be


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What is Strategy? : Working Definition

The businesses the firm is in or is to enter and how it will compete in them

(objectives and positioning statement)

An integrative pattern ofdecisions engaging all the levels of the firm

-fundamental positioning: product-market focus and key stages of the value

chain

-important elements of functional policies describing the fundamental

positioning in detail

The long-term actions and resource allocation priorities of the firm

(big decisions and / or sum of many operational decisions)

to achieve long-term sustainable

competitive advantage in its industry and

ultimately success


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What does Success means?

Returns greater than investments of similar risk (opportunity cost of

capital; risk adjusted)

Exist when rate of return on invested capital (ROIC) exceed cost of

capital (r): ROIC > r

Above-Average Returns


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Strategy as Design

Planning and

rational choice

INTENDED

STRATEGY

Many decision makers

responding to multitude of

external and internal

forces

REALIZED

STRATEGY

EMERGENT

STRATEGY

Strategy as Process

Strategy Making: Design or Process?

Source: Henry Mintzb erg, Of Strategies, Deli berate and Emergent, in: SMJ, Vol. 6 (1998), pages 257 -272


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Examples for different types of strategy

Emerging Strategy: Aldi


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Examples for different types of strategy

Intended Strategy: Bayer AG purchasing ScheringAG


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The Basic Framework: Fundamentals of Strategy

Superior Long-Run

Performance

Attractive IndustryStructure

Competitive Advantage

Superior CompetitivePosition

OperationalEffectiveness

Do different things than

rivals

Do the same things as

rivals but better

The central goal

High returns for the

average participant

Outperform the average

industry participant


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One important distinction:Business, Corporate and Functional Strategy

Most companies are diversified: active in more than one industry withdifferent organizational units (business units)

A diversified company has 3 levels of strategy

Business Strategy

How a firm competes within a particular market and industry?

Create a competitive advantage in its given industry

Corporate Strategy

Which businesses should we be in?

How to create value for the corporation as a whole?

Operational/Functional Strategy

How each part of the business is organised to deliver the corporate andbusiness-unit level strategic direction

Focuses on issues of resources, processes, people, etc.


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The problem of defining the business What business are you in?

The railroads did not stop growing because the need for

passenger and freight transportation declined The railroads are

in trouble today not because the need was filled by others (cars,

trucks, airplanes, even telephones), but because it was not filled by

the railroads themselves. They led 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.

Ted Levitt (1960)

3Source: Theodore Levitt Marketing Myopia, Harvard Business Review (HBR) ;1960Most popular article ever wi th 850,00 reprints


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Starting point of business definition: market definition

1. Product- and supplier-oriented approaches

2. Customer-oriented approaches

All products and services which have physical-

technical similarity/ functional similarity

All products/services which are perceived as substitutes

by the (potential) buyers (relevant market)

Key measure: cross-price elasticity


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Business definition: the market and industry segments afirm is operating in

Business = industry segment in which company operates where it ispossible to build barriers against other firms (=competitive advantage), byhaving lower costs or differentiation

There are basically two types of barriers

cost barriers: large differences in value chain activities leading to differentcost positions

customer value barriers: different customer groups and needs

A business can be defined by

products/services

customer segments

company activities and technologies (value chain)

regions

different distribution channels

Source: Bain & Company, Business DEfinition; Richard Koch, The Financial Times Guide to Strategy


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The concept of value proposition helps to define thecustomer groups and needs resulting in customervalue barriers

What Relative

Price?

What

Customers?

What end users?

What channels?

Which customer

needs?

Which features?

Entrepreneurial/creative process:

A new value proposition can

create a new industrySource: Michael M. Porter; What is strategy? World Business Forum, June 6, 2006

Which

products?


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The concept of value chain helps to define differences incost structures leading to cost barriers

Separate value chains One Integrated value chain

Ability to Leverage Key Activities Across Businesses

Source: Michael M. Porter; What is strategy? World Business Forum, June 6, 2006

Marketing& Sales

(e.g. SalesForce,

Promotion,Advertising,

ProposalWriting, Web

site)

InboundLogistics

(e.g.IncomingMaterialStorage,

DataCollection,Service,CustomerAccess)

Operations

(e.g.Assembly,ComponentFabrication,

BranchOperations)

OutboundLogistics

(e.g. OrderProcessing,

Warehousing,Report

Preparation)

After-SalesService

(e.g.Installation,CustomerSupport,

ComplaintResolution,

Repair)

Marg

in

Primary Activities

Firm Infrastructure(e.g. Financing, Planning, Investor Relations)

Procurement(e.g. Components, Machinery, Advertising, Serv ices)

Technology Dev elopment(e.g. Product Design, Testing, Process Design, Material Research, Market Research)

Human Resource Management(e.g. Recruiting, Training, Compensation System)

Value:

What

buyers are

willing to

pay

Support

Activities


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Demand and/or value chain differences lead tocost barriers and/or customer value barriers which create aseparate business arena

High Low

Customer value barriers

Low

Cost barriers

High One

Business

Separate

Business

Source: Bain & Company, Business Definition; Richard Koch, The Financial Times Guide to Strategy


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Business definition helps to determine what businessbattlefield is most defensible

Business definition describes defensible segment

too broadly defined: company can be overtaken by morefocused competitors

too narrowly defined: company overtaken by more broadlybased competitors

Business definition can be used to re-segment an industry

either by creating a new, smaller segment out of an existingsegment or by merging two segments together

can we obtain lower costs and/or higher prices (createcompetitive advantage) by redefining the segment andchanging the rules of the game?



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Quick test if two potential segments are onebusiness or two businesses: direct competitors areinside this boundary, indirect competitors are outside

Are the competitors in the two potential industry

segments different or the same? and

Do the competitors have roughly similar market

share positions in the two potential segments?

If so, two industry segments are probably one singlebusiness segment; if not, they are two different

business segments



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Examples for redefining an industry

Low Cost Airlines and traditional Flag Carriers

Discount retailing and full-service retailing

Direct selling of personal computers and sales

through channels


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An industry map illustrates the difference between businessstrategy and corporate strategy

Other

Variable

(e.g.

regions;

value

chain/

cost

structure)

Corporate Strategy: Diversification Strategy

Business Strategy 1

Business A Business B Business C

Market : Product Customer Segments

Business Strategy 2


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Corporate vs. business strategy: a diversifiedcompany, which is active in more than one business,has two levels of strategy

DPWN

MailFinancial

ServicesLogisticsExpress

Example: Deutsche Post World NetExample: Deutsche Post World Net

Source: Corey Phelps; Mgmt 430

CORPORATE

STRATEGY

BUSINESS

STRATEGY


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1

Agenda



- Course overview



- Next session


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Mini-Case assignments

A number of companies are selected to apply frameworks and toolsthroughout the course

At the end of each session there will be usually a short assignmentwith 1 or 2 questions to be worked on

In the beginning of next session teams present their soluton(format: 1-4 pages; max 10 minutes presentation)

Class will split in a number of teams with 3-6 members each

Companies can be chosen from the following list: BMW

Hugo Boss Lufthansa SolarWorld Beiersdorf


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52 2007 Prof. Dr. Bernd Venohrwww.solarworld.de www.beiersdorf.de

Mini-Case assignments

www.group.hugoboss.com www.lufthansa.comwww.bmw.de


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Team list

Team

Members


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1

Agenda



- Course overview

- Break

- Strategy concept


- Next session


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55 2007 P f D B d V h

Read slides on session 1 on ILIAS

Finalize your team

Visit company web page and prepare as team a brief description of the

company strategy Product and Service offering

Markets served, customer groups and competitors

Overview organization chart

Key financials: Revenue and profits (last business year)

Topics of next session: Brief 4 page presentation; bring on usb stick

Lecture: Economics of Strategy

Next session

01 overview strategy concept

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