MBA: Strategy and Business Policy

Dr. Tim R. Holcomb

What is Strategy?

• Strategy and strategic positioning

– What is strategy?

– Elements of the business strategy diamond

– Mapping a strategic position

• Importance of tradeoffs in achieving strategic fit

– Deciding what to do and what not to do

• Sources of competitive advantage

– An economic view of value creation

– Sustaining competitive advantage over time

1–2

Topic Objectives

1–3

Three Overarching Themes

Implementing a good

strategy is at least as

important as creating

good one…yet many

managers give too

little thought to

implementation

Strategic leadership

is responsible for:

making substantive

resource allocation

decisions and

developing key-

stakeholder support of the

strategy

We need to see a firm’s competitive position, not as a snapshot, but as an ongoing movie …

Firms and

industries are

dynamic in

nature

To succeed,

the formulation

of a good strategy

and its implementa-

tion should be

inextricably

connected

Strategic leader-

ship is essential if a

firm is able to both

formulate and imple-

ment strategies that

create value

Key Elements of Strategy

Staging

&

Pacing

Differentiators

Arenas

Arenas: Where will we be active (and with

how much emphasis)?

• Which product categories?

• Which channels?

• Which market segments?

• Which geographic areas?

• Which core technologies?

Vehicles: How will we get there?

• Alliances/Joint Ventures?

• Mergers and Acquisitions?

• Franchising?

• Exporting? Licensing?

• Internal development?

Differentiators: How will we win?

• Price?

• Styling?

• Image?

• Product reliability?

• Customization?

• Speed to market?

Economic logic: How will

returns be obtained?

• Lowest costs through scale advantages?

• Lowest costs through scope and replication

advantages?

• Premium prices due to unmatchable service?

• Premium prices due to proprietary product features?

Staging & pacing: What will be our speed

and sequence of moves?

• Speed of entry/expansion?

• Sequence of initiatives?

• Level of investment?

• Pace?Vehicles

Economic

Logic

The Business Strategy

Diamond

1–5

Example: Jet Blue Strategy

• “Competitive strategy is about being different. It

means deliberately choosing to perform activities

differently or to perform different activities than rivals

to deliver a unique mix of value.”

– Michael Porter

• “The essence of strategy lies in creating tomorrow’s

competitive advantages faster than competitors can

mimic the ones you possess today.”

– Gary Hamel & C. K. Prahalad

• “Successful business strategy is about actively

shaping the game you play, not just playing the game

you find.”

– Adam Brandenburger & Barry Nalebuff

What is Strategy?

Chipmunk's Plan For Future Better Crafted Than That Of 8 Out

Of 10 Americans | The Onion

• Strategy is the creation of unique and valuable

positions

– involves combining sets of activities and resources

that differ in meaningful ways and creating fit among

those activities and resources

• What is the significance of a strategic position?

What is Strategy? (cont.)

Developing a Unique and Valuable Position

Compare and contrast the

strategic positions of these

companies in the market

with

with

with

with

• Strategy involves creating fit among a company’s

activities

– Drives competitive advantage and sustainability

– Requires choice that purposefully limits what firm can do

– Occurs most often when:

• different positions create inconsistencies in firm’s brand

• different positions require different resources and/or activity sets

• Establishing a sustainable strategic position requires

trade-offs

• “The essence of strategy is choosing what not to do.”

~ Dr. Michael Porter

• What is the significance of trading-off one position

with another?1–9

What is Strategy? (cont.)

1–10

Achieving Strategic Fit/Trade-offs

Swoosh! Inside Nike | NBC Today

What are some of the trade-offs these firms made?

Minyanville Starbucks: Venti, Vidi, Vici! | MSNBC

1–11

Levels of Strategy

Corporate-level strategy addresses:

• In which markets do we compete

today?

• In which markets should we

compete tomorrow?

• Does/How does our

ownership of a business

ensure its competitiveness

today and in the future?

• How do we compete in this market

today?

• How should we compete in this

market in the future?

Business-level strategy addresses:

What questions does each type of strategy address?

What is Competitive Advantage?

• Competitive advantage comes from the way

activities fit and reinforce one another

– Strategic fit = competitive advantage + superior

profitability

• Is achieved when firms implement a strategy that

competitors are unable to duplicate or find too

costly to imitate

– “Competitive advantage grows fundamentally out of

value a firm is able to create for its buyers [consumers]

that exceeds the firm’s cost of creating it.” – Porter

What is Competitive Advantage? (cont.)

• Is sustained by driving a wedge between buyer

willingness to pay and value added by the firm

– Added value is marginal value created by the firm

(value that would be lost by its absence)

– The larger the added value, the larger the potential

profit for the seller

• Thus, strategies must evolve as circumstances

change

• A firm's relative position within its industry

determines whether a firm's profitability is above

or below the industry average

– Achieved when firms implement a strategy that

competitors are unable to duplicate or find too costly

to imitate

• The fundamental basis of above average

profitability in the long run is sustainable

competitive advantage

– Strategies must create and capture value

1–14

What is Competitive Advantage? (cont.)

Competitive Advantage and Value Creation: Conceptual Foundation

“…the concept of value creation lies at the heart of

competitive advantage.”

An economic view of value creation

VALUE

Product A

Total value created includes the real economic

value realized by market actors and the

subjective benefits realized by the customer

PRICETotal price includes the economic

considerations for the customer as well

as for the company

COSTTotal cost includes economic

costs and other resources used

in producing and delivering the

product/service

Competitive Advantage and Value Creation: Conceptual Foundation (cont.)

Firm’s

Cost

$30

C

Consumer’s

Maximum

Willingness

to pay

$100

B

Firm’s

Cost

$30

C

Consumer

Surplus

$45

B-P

Producer

Surplus

$25

P-C

Value

Created

$70

B-C

Maximum-

willingness-to-pay

(price at which the

consumer is

indifferent between

buying the product

or going without it)

Price

Firm’s

Cost to Produce

Value-created = Consumer Surplus + Producer Surplus

Assume the P of a unit is $55, then:

How value is created

• In financial terms, a competitive advantage is assumed when a firm earns a higher rate of economic profit than the average rate of economic profit of other firms in the same market

• That said, a firm’s economic profitability within a particular industry depends on (1) the economic attractiveness or unattractiveness of the market in which it competes and (2) its competitive position in that market– So, what’s more important … the competitive forces at

work in a market? or the strategic chooses it makes to compete in the market?

• Can a firm ‘lose’ its competitive advantage?

What is Competitive Advantage? (cont.)

What is Competitive Advantage? (cont.)

External Sources

• Underlying assumptions of the industrial organizational (I/O) model of above-average returns

– Macro environmental forces impose constraints that determine firm strategies

– Firms in the same market segment likely control similar strategically relevant resources and therefore pursue similar strategies

– Resources for implementing strategies are highly mobile across firms; therefore resource advantages are short-lived

– Organizational decision makers (i.e., top managers) are rational and always committed to acting in the firm's best interests

Internal Sources

• Underlying assumptions of the

resource-based model of

above-average returns

– Resources are the basis for

competitive advantage:

• Each firm’s performance across

time is function of the attributes of

resources it controls

• A source of advantage when they

are valuable, rare, costly to imitate

and nonsubstitutable

– Combined uniqueness of firm

resources determine the strategic

actions it can/should take

1–18

Potential Sources of Competitive Advantage

• Competitive advantage is achieved by driving a wedge between buyer willingness to pay and value added by the firm– Value = difference between buyer’s willingness to pay

and seller’s opportunity cost

– Added value = marginal value created by the firm (value that would be lost by its absence)

– The larger the added value, the larger the potential profit for the seller

• Industry structure matters, but success does not come just from industry attractiveness

• Strategies must evolve as circumstances change

1–19

Creating Competitive Advantage: A Summary

• Understand the external environment:– markets, technology,

regulation, economic conditions

• Understand resources and capabilities:– physical, human, and

organizational capital

• Combine environmental and internal analyses to identify potential strategic positions

• Develop strategy and organizational architecture

Planning for Success

On the one hand …

“The essence of strategic planning is the systematic identification of opportunities and threats that like in the future [to] provide a basis for making better current decisions.” – George Steiner

“There are significant benefits to gain through an explicit process of formulating strategy to insure that at least the policies (if not the actions of functional departments) are coordinated and directed at some common set of goals.” – Michael Porter

On the other …

“Planning is the substitution of error for chaos.” – Anonymous

“Most corporate planning is like a ritual rain dance: It has no effect on the weather that follows, but it makes those who engage in it feel they are in control.”– Russell Ackoff

1–21

Differing Perspectives on Strategic Planning

Learn to Think “Outside the Box”

The greatest

difficulty in the world

is not for people to

accept new ideas,

but to make them

forget about old

ones.~ John Maynard Keynes, Economist

• It is focused

– It is not diffused across all potential aspects of the

market

• The shape of the value curve diverges from any

potential competitors

• It has a compelling tagline

Characteristics of a “Good” Strategy

1–24

Strategy Implementation: What’s the big deal?

1–25

Framework for Strategy Implementation

Intended

Strategy

Realized

and

Emergent

Strategies

Key Factors of Strategy Implementation

Implementation levers

– Organizational structure

– Systems and processes

– People and rewards

Strategic leadership

– Resource-allocation decisions

– Decision support among stakeholders

The right of any corporation to exist is not perpetual but has to be continuously earned.

– Robert Simmons