Foundations of Strategy Overview

Elizabeth AllenMike Mullin

Michael JohnsonJoshua Zamarron

James Stariha

Chapter 1: The Concept of Strategy

The role of strategy in success

Strategy today

The approach taken in this book

The Role of Strategy in Success

Goals that are simple, consistent, and long termSingle-minded commitment to clear goal

Profound understanding of competitive environment

Objective appraisal of resourcesExploit internal strengths and protect areas of weakness

Effective implementationEmergence of organizations and responding to changes in the environment

The Role of Strategy in Success

Simple, consistent, long-term goals

Successful Strategy

Effective Implementation

Profound understanding

of the competitive environment

Objective appraisal of resources

Strategy Today

Strategy DefinitionsThe means by which individuals or organizations achieve their objectives (FS Book)

A plan, method, or series of actions designed to achieve a specific goal or effect (Wordsmyth Dictionary)

The determination of the long-run goals and objectives of an enterprise and the adoption of courses of action and the allocation of resources necessary for carrying out these goals (Alfred Chandler, Strategy & Structure)

The 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 (Kenneth Andrews, The Concept of Corporate Strategy)

Strategy Today

Corporate strategyDefines the scope of the firm in terms of the industries and markets in which it competes

Business strategyConcerned with how the firm competes within a particular industry or market

The Approach Taken in this Book

Companies operate in the interests of their owners by seeking to maximize profits over the long term by pointing to four key considerations

Competition

The market for corporate control

Convergence of stakeholder interests

Simplicity

The Approach Taken in this Book

CompetitionErodes profitability

As competition increases, the interests of different stakeholders converge around the goal of survival

The Market for Corporate ControlManagement teams that fail to maximize the profits of their companies will be replaced by teams that do

The Approach Taken in this Book

Convergence of Stakeholder InterestsThere is likely to be more community of interests than conflict of interests among different stakeholders

SimplicityA key problem of the stakeholder approach is that considering multiple goals and specifying trade-offs between them vastly increases the complexity of decision making.

Chapter 3: Resources and capabilities

The role of resources and capabilities in strategy formulation

Identifying the organization’s resources and capabilities

Developing resources and capabilities

Resources and Capabilities

Firms industry environments have become more unstable, so internal resources and capabilities have become more secure base for formulating strategy

It has become increasingly apparent tha competitive advantage rather than industry attractiveness is the primary sources of superior profitability

Resources and Capabilities

Resources are the productive assets owned by the firm

Capabilities are what the firm can do

Resources must work together to create organizational capability

Capability is the essence of superior performance

Identifying ResourcesTangible Resources

Easiest to identify and evaluate

Financial resources, Physical resources

Intangible ResourcesTechnology

Reputation

Culture

Human ResourcesSkills/know-how

Capacity for communication and collaboration

Motivation

Identifying Capabilities

Organizational Capability – a firm’s capacity to deploy resources for a desired end result

To perform a task, a team of resources must work together.

i.e. a brain surgeon with a radiologist, anesthetist, nurses, etc.

Distinctive Competence – those things that an organization does particularly well relative to its competitors

Developing Resources and Capabilities

Having managers with knowledge for capability building

Acquiring capabilities through mergers, acquisitions, and alliances

Internal development(focus and sequencing): Capability development needs to be systematic and a step by step process of design and implementation through several stages and in order.

Chapter 5: Business strategies in different industry and sectoral contexts

The industry life cycle

Strategy at different stages of the life cycle

Scenario planning

The Industry Life Cycle

Is the supply-side equivalent of the product life cycle, occurs over a much longer time span

Comprised of four phasesIntroduction

Growth

Maturity

Decline

Two main factors that are fundamental:Demand growth

Production and diffusion of knowledge

Demand Growth

In the introduction stage, sales are small and the rate of market penetration is low because the industry’s products are little known and customers are few. Customers tend to be innovative oriented and risk-tolerant.

The growth stage is characterized by accelerating market penetration as technical improvements and increased efficiency open up the mass market

Increasing market saturation causes the onset of the maturity stage. Once saturation is reached, demand is wholly for replacement

As the industry becomes challenged by new industries that produce technologically superior substitute products, the industry enters its decline stage

Production and Diffusion of Knowledge

New knowledge in the form of product innovation is responsible for an industry’s birth

Dual processes of knowledge creation and knowledge diffusion exert a major influence on industry evolution

Over the course of the industry life cycle people become more knowledgeable about the performance attributes so they are better able to judge value for the price

Change focus from product innovation towards process innovation

Strategy at Different Stages in the Life Cycle: Introduction Stage

The introduction stage typically features a wide variety of product types that reflect the diversity of technologies and designs and the lack of consensus over customer requirments

The basis of entry is product innovation

Success comes from winning the battle for technological leadership

Gross margins can be high, but heavy investments in innovation and market development tend to depress return on investment

Strategy at Different Stages in the Life Cycle: Growth Stage

One of the key challenges becomes scaling up, as the market expands the firms needs to adapt its product design and manufacturing capabilities to large-scale production

More sophisticated financial, administrative, and strategic skills become necessary

Need to reduce cost and less need for sophisticated labor as production processes eliminates the need, leads to a shift in production and assembly to newly industrialized countries

Strategy at Different Stages in the Life Cycle: Maturity Stage

Competitive advantage increasingly becomes a quest for efficiency

Key Success factorsCost efficiency through scale economies

Low wages and low overheads

The number of firms begins to fall as product standardization and excess capacity stimulate price competition

Often industries go through one or more “shake out” phases during which the rate of failure increases rapidly

Further un-skilled labor required, shifts almost entirely to developing countries where the costs are low

Strategy at Different Stages in the Life Cycle: Decline Stage

Transition can result from technological substitutes, changes in consumer preference, demographic shifts, or foreign competition

Key features of declineExcess capacity

Lack of technical change

Aggressive price competition

Declining number of competitors

Two determinants of whether or not a declining industry becomes a competitive bloodbath

Balance between capacity and output

Nature of the demand for the product

Scenario Planning

Scenario analysis: systematic way of thinking about how the future might unfold that builds on what we know about the current trends an signals

Scenarios are stories that describe how the world might look in the future; these stories are used to review and test strategic options

Approach is to construct several distinct, internally consistent narratives of how the future may look 5-25 years ahead

Scenario Planning Key Steps

Define the purpose of the analysis

Decide on the time horizon

Indentify key trends

Identify key uncertainties

Create the scenario and check that they are internally consistent

Identify indicators that might signal which scenario is unfolding

Assessing the strategic implications of each scenario

Chapter 6: Technology-based industries and the management of innovation

Competitive advantage in technology-intensive industries

Strategies to exploit innovation: how & when to enter

Creating the conditions for innovation

Competitive advantage in technology-intensive industries

The innovation process Basic Knowledge Invention

Innovation Diffusion

Supply side – Imitation

Demand side – Adoption

The Profitability of Innovation

Property rights in InnovationIntellectual property: Patents, Copyrights, Trademarks, and Trade Secrets

Codifiable Knowledge“That which can be written down”

Coca-Cola, Intel’s Design

Lead-TimeLead-Time advantages

Microsoft, Intel, and Cisco Systems

Complementary ResourcesBiotech firms ally with large pharmaceutical compaines for clinical testing

Strategies to exploit innovation: how & when to enter

Alternative Strategies to exploit innovationLicensing, Outsourcing certain functions, Strategic Alliance, Joint Venture, and Internal Commercialization (Risk and Return and Resources requirements)

Characteristics of the InnovationEstablishment of Property rights critically determines the choice of strategy options.

Resources and Capabilities of the Firm

Timing Innovation: To Lead or to Follow?Leaders don’t always grab the prize. Risks and cost of pioneering

Protection of property rights or lead-time advantage

Importance of Complementary resources

The potential to establish a standard

Creating the conditions for innovation

Managing CreativityCreativity is stimulated by human interaction

Amgen and Google

Organizing for CreativityQuite different from efficiency

Google: Engineers have considerable discretion at to which project to join

From Invention to Innovation: The Challenge of integrationMust be directed and harnessed to create value for both company and society

Cross functional development teams, product champions, buying innovation, and open innovation

Chapter 7: Corporate Strategy

The scope of the firm

Key concepts for analyzing firm scope

Diversification

Scope of The Firm

Product Scope– How specialized the firm is in terms of the range of products it supplies.

E.g. Coca-Cola, Gap, SAP

Vertical Scope– The range of vertically linked activities the firm encompasses.

Geographical Scope– The geographical spread of activities for the firm.

Key concepts for analyzing firm scope

Firm’s extend or reduce their scope because they perceive this to be in the firm’s best interest

Economies of scaleReduction in average costs that result from an increase in the output of a single product

Economies of scopeCost economies from increasing the output of multiple products

Creates potential for multi-business firms to gain cost advantages over more specialized business

Key concepts for analyzing firm scope

Tangible resourcesDistribution networks, info technology systems, sales force, labs

Offer economies of scope by eliminating duplication between businesses through creating a single shared facility

Ex: cable TV companies and telephone companiesShared services organizations

Intangible resourcesBrands, reputation, technology

Offer economies of scope from the ability to extend them to additional businesses at low marginal cost

Ex: StarbucksBrand extension

Diversification

The expansion of an existing firm into another product line or field of operation

The Benefits and Costs of Diversification: Why do companies strive to diversify?

Growth

Risk reduction

Value creation

Our Company Amgen

On January 26, 2012 Amgen released a statement about their most recent a successful acquisition, Micromet, for 1.16 Billion dollars.

Micromet is a biotechnology company that’s main capability is oncology development

This is an example of diversification, due to the expansion of Amgen’s current field of operation into the field of operation of Micromet.

Chapter 9: Realizing Strategy

The organizational challenge: reconciling specialization with coordination and cooperation

Management systems

Corporate cultures

The Organizational Challenge

Reconciling specialization with coordination and cooperation

The fundamental source of efficiency in production is specialization through the division of labor into separate tasks.

Henry Ford found huge productivity gains with his assembly line. Cutting the time to assemble the Model T from 106 hours to 6 hours in only two years.

Costs of specializationMore divided the process, the more complex the challenge of integrating the efforts of individual specialists

Leads to cooperation problem and coordination problem

Management Systems

Provide the mechanisms of communication, decision making and control that allow companies to coordinate and integrate activities

The Four Management Systems

Information Systems: Collect, organize and communicate financial information to top management and other parts of the organization

Strategic Planning Systems: important method for achieving coordination within a company. The strategic plan is often made up of the following

Statement of goals

Set of assumptions or forecasts

Qualitative statement

Specific action steps

Financial projections

The Four Management Systems

Financial Planning and Control Systems: primary mechanism through which top management seeks to control the company

Human Resource Management Systems: an incentive system that promotes the implementation of plans and targets by aligning employee and company goals and ensuring employees have the skills necessary for his or her job

Corporate Culture

Corporate Culture: refers to the values and ways of thinking that managers wish to encourage in their organization

Studies that have been attempted do suggest that organizations with strong corporate cultures do have better long term financial performance than those who do not, although the tests used to find this may not have been totally reliable

THANK YOUANY QUESTIONS?