University of Massachusetts Lowell

Manning School of Business
Strategy Formulation and Implementation
MGMT.6910

Class Notes Week 1 – Introduction to Strategy
Trying to predict the future is like trying to drive down a country road
at night with no lights while looking out the back window.
Peter Drucker

Table of Content

What we did last week.........................................................................................................1
What we will do this week...................................................................................................1
Assignments for this week...................................................................................................2
Reading............................................................................................................................2
Discussion Board.............................................................................................................2
Chat..................................................................................................................................3
Individual assignments....................................................................................................3
Group Projects.................................................................................................................3
An Introduction....................................................................................................................3
Syllabus and Course Requirements...................................................................................10
Overview of Strategy Process............................................................................................10
Strategy Planning Concerns...........................................................................................12
Market Vs Opportunity Share........................................................................................12
Tops Down Vs Bottom up Strategy...............................................................................13
Impact of Environment..................................................................................................13
Importance of Strategy Execution.................................................................................14
Integration......................................................................................................................14
Business Basics..................................................................................................................16
Mission/Vision...............................................................................................................17
Text Book Chapter 1 Highlights........................................................................................19
Additional Points on “Strategy”........................................................................................20
An Example: IBM..............................................................................................................21

What we did last week
Hope you are enjoying winter and staying warm! Ready to finish your “last mile”?

What we will do this week
Welcome to MBA Strategy Formulation and Implementation on line course. This is your
“final stop”! You have made it! Congratulations!

During this first week of our online learning experience, we will introduce the subject of
Strategy (and its execution), discuss the Syllabus, course requirements and other course
logistics considerations.

General format of each week's notes will start with “What we did last week”, “What we
will do this week” and “Assignments”. Remainder of these Class Notes will include
specific discussion of topics included in Class Schedule.

Assignments for this week

Reading
Read Class Notes 1
Read Chapter 1

Discussion Board
Question Assigned to
Q. 1 Review P&G’s income and balance sheet statements (see my email)
for the last 5 years (you will get this data from their
website) and comment on trends in revenue, gross
margins, R&D, SG&A, cash position and debt (it is
suggested that you convert income statements to a
common size statement, that is all line items as % of
revenue). Include in your comments what you see as their
strategy and how do you think they are doing.
Post question(s) for instructor and/or comments to ALL
share with all

Chat
Our regular chats will be a Chat Session on Sunday from 8:00 to 9:00 AM for
Section 061/AB1 and 9:00 to 10:00 AM for Section 062/AB2. Do plan to attend.

Week 1 Chat is recorded, please review it.

Individual assignments
Your individual assignment 1 (Unilever) is due week 5, but it is available on Blackboard
for you to review, we will discuss during week 3 chat session

Group Projects
We have one (1) group project: a Business Simulation (using Business Strategy Game –
BSG). You will need to complete student information form (in Blackboard) and submit it
to me as instructed. I will need this information to form groups.

Class notes begin *********************************************************************** * An Introduction Let us start by taking a look at a few well known companies and try to understand their businesses. Rivalry between these 2 companies goes back to early 1980’s. we will just focus on their performance in last 10 years. and only looking at their income statements. Below you will see data from 2000 to 2011 for these 2 companies. similarities and differences among them. . This will set the stage for our discussions over the next 10 weeks. At this point. First we will start with 2 very familiar companies: Microsoft and Apple.

where as Apple has recorded explosive revenue growths over the period. we know that Apple has entered in new markets in last 10+ years. a strategy execution issue? .What do we see here? Looking at a few key numbers. Strategy of creating new markets as opposed to staying in same (probably maturing) markets? Or. whereas. Why? What is Apple’s strategy? What is Microsoft strategy? As a % of revenue. we see that Microsoft has slowed down. Microsoft is spending about 6 times the rate of Apple in R&D. Is Microsoft R&D productivity very low compared with Apple? Obviously. not being able to gain from R&D. Microsoft has not successfully ventured in any new markets.

new markets. we can point to a number of reasons for their poor performance: lower pricing and/or higher discounts.There are many more questions that one can raise. their strategy that would have caused these jumps. We could go to their Annual reports to further analyze. What do we observe from their Income Statement above? Rather than looking at all numbers. Obviously we would have to dig deep into their operations to really know what happened. gross profits are steadily going down since 2002. but for now. we will leave at just these few questions and will revisit later… Next let us look at Maytag Corporation. new products. This will point to. higher . let us just take a look at their revenues and gross profit over the years. etc. Question is “What caused revenues to go up substantially (over 11%) in 2001 and 2002 and why are GP going down?” There could be a number of reasons for revenue jumps: better economy leading to higher demands. hopefully. We see that revenues went up in 2001 and 2002 and then leveled off. Looking at GP numbers. which I am certain you all know. lower pricing. After analyzing further we would find that Maytag had a strategy of growth through acquisition. Financial data below are prior to Whirlpool acquiring Maytag. whereas. low plant utilization. inventory going up.

labor costs. Now let us take another example. Common size statements help us look at trends more easily. have they divested certain businesses? Left some markets? Dropped some products? Etc... more later. their bottom line is improving. Microsoft Maytag and Xerox.7B in 2005.. You see that their revenues have been going down since 1999. Again. More later. etc. we should convert income statements to “Common Size” statements. of Xerox.. Common size statements represent all line items in an income statement as % of revenue (as you see in Xerox example above). It faced a stiff competition from Japanese vendors beginning in 1980’s and lost its market leadership position. . Some or all of could lead to understanding strategy and execution challenges. it might suggest that there must be a Strategy and a Plan When analyzing financial data as we have done above for Apple. questions to ask: are they better managing their resources? Or... just cutting costs? Since revenues are fairly flat since 2002 (after going down since 1999) and NI going up in the same timeframe (after recording losses in 2000 and 2001) over a period of time. a company that has been going through a transformation for quite a while. However. Again. On the net income side. we can ask questions that raised earlier: Why are revenues dropping. from about $19B in 1999 to $15.

etc. their revenues have dropped from $12. they have been shedding businesses and/or disposing assets to transition (?) to a specific business focus (digital imaging technologies?). Fuji Film has been very successful in its strategy of diversification. some companies are able to adapt and overcome the situation. life sciences systems. While Kodak has been struggling. By then. As you can see from the chart below. The company has recorded losses since 2005 and financials have been going through roller coaster ride.5B in 2002 to $7. medical and drugs businesses. Fujifilm was able to overcome by diversifying. To answer these and many other questions.2B 2010 (it went up in 2003 to 2005). As you can see. Fuji’s CEO recently stated that “…when a company loses its core business. In the 70’s and 80’s. Kodak attempted to diversified into chemicals. Eastman Kodak. but did not do much with it until 1990’s.” . its main rival. I am sure you have been reading a lot about Kodak’s problems for the past several years. optical. Kodak was the first company to invent digital camera in 1975. Several questions can be raised: is their strategy consistent with the environment? Is their strategy too little. very low for a manufacturing company. Fuji applied its expertise in film (and chemical elements) to enter into such markets as medical systems. one would need to go beyond this simple financial statement. recording. For example. and their bankruptcy filing last January. while others are not.Next we take an American icon. only to divest later as they were faced with financial problems and many management changes. one has to look into their gross profit ratios. too late? Are they executing effectively? Do they have the appropriate structure and staffing to execute? Etc. it was very late as many companies from technology fields entered the market. graphic. as well as stay in digital photography by making very tough decisions of cutting drastically in film-based photography..

So.Now let us take our final example: Fedex and UPS. companies do not consider “What not to do?” as one of their options. Strategy Choice is considered the prime reason for their revenue performance. . one can argue the innovation and agility of Apple Vs Microsoft’s inability to create new markets or unable to execute strategy  In Maytag case. both Strategy Choice and Execution remain challenges as these companies face a very rapidly changing environment.  Strategy Choice means that a company has many options available. selection depends on many factors (external and internal). Most often. to sum up:  In Apple and Microsoft Cases. They forgot Execution  And in case of Xerox and Kodak. both high performing and well established fierce competitors. Maytag decided to go for growth through acquisition and failed because they really did not look at the option of “what not to do”.

These Notes will also contain Questions and Assignments. Make sure you have reviewed it carefully. Overview of Strategy Process . Details are given in the syllabus.  This course will focus on both Strategy Formulation and its Implementation It has been a long introduction. Syllabus and Course Requirements You will find a detailed “syllabus” posted under this Course. will provide extracts and additional views. It provides examples to clarify/expand concepts and management practices. Discussion Board Postings (responding to specific questions). relevant to the Case on UPS. and more current. There will be a weekly Round (of one year) and will see results of your decisions. As a group. Class Notes. you will be making decisions in different functional areas like R&D. Group Projects and Final Report. “Crafting and Executing Strategy”. examples to make a few points. companies must apply the test of executability of their strategy: compatible culture? right organization? Right leadership? right people? Proper resource allocation? Etc. based on my teaching this subject since 2002. like the one you are reading. Let us highlights a few items: Text Book: we will be using selected chapters from a text book by Thompson. BSG – business simulation: BSG is a simulation software that provides a decision making experience in strategy and management. Case Studies: I have selected 3 key business case studies from Harvard Business School Press and they substantially complement both text book and class notes. If you have any questions on the syllabus.  Execution is the most neglected part of management process in many companies. Marketing. I will be providing you with more details later. Where appropriate. but this subject matter requires that we start with real life. I have also uploaded PowerPoint slides complementing notes. please post on Discussion Board. There is an additional Case on Scenario Planning. et al. You will be competing with other teams. Manufacturing and finance. I will respond to these questions within 24 hours. and my strategic planning experiences in business world. Execution means that while developing a strategy. The syllabus describes course objectives and requirements. Your performance evaluation will be based on Assignments.

Founder DEC. and adoption of courses of action and allocation of resources. business and functional strategies • Implementing through changes in organizational structures and control systems However. . Kodak. etc.over the next quarter century no more than a third of today's major corporations will survive in an economically important way.Strategy has many definitions! One book lists some 66 definitions! We will be using this definition in our discussion: Strategy … a determination of long-term goals and objectives of an enterprise. IBM. in many instances. for example: “I think there is a world market for maybe five computers” Watson. Best Buy. 1977 . structured process • Conducting environmental scan/analysis • Establishing mission/goals • Choosing corporate. structured and administered through organizations (Chandler. top down. Maytag. why are these and so many others experiencing difficulties? Traditional/Current view of strategy planning adopted by many large (as well mid size) companies • Rational.original list companies stayed on list for an average of 65 years. History is full of lessons on the Future. 1949 “There is no reason anyone would want a computer in their home” Olsen. Chairman IBM 1943 “Nobody wants to watch a box night after night” Zanuck. the average anticipated tenure of a company on the expanded S&P 500 was 10 years. this traditional view  Downplays existence on unintended consequences of actions  Ignores/downplays inherent unpredictability of environment  Is a tops down process and ignores the role of emergent strategy The traditional process does not fully consider the Future. . 20th Century Fox Chairman. HBS 1962) Strategy concepts and practices have been implemented and used by many large corporations. S&P index of 90 major US companies created in the 1920s. . So. including Apple. Microsoft.By 1998.

Communication .75% have a SP process. “We don’t like their sound and guitar music is on the way out” The Decca Recording Company. Key concerns: . create new competitive space through groundbreaking new products Vs fighting for incremental slices of the same pie) .Strategy execution . thus creates execution issues  Too quantitative and analytical  Does not recognize/accept fast changing World  Lacks employee empowerment  Focuses on Market share Vs Opportunity share (i.Performance measurement There are many short comings of traditional strategy planning:  Too much structured. tops-down. <25% say it’s key to critical decisions .Only half satisfied with approach to planning strategy .e.Organizational alignment . rigid  Lacks organizational involvement.CEO/senior executives drive decision making . rejecting Beatles 1962 Strategy Planning Concerns A recent survey by McKinsey (July/August 2006) of Strategy and Financial executives from large multinational corporations concluded that .

Mintzberg (1987) discussed a multi-dimensional view of strategy: Intended strategy. mapping onto your own internal capabilities and coming up with “new game. First MP3 was introduced in 1987 and attracted several small companies. Strategy planning requires a view of such external factors. let us take an example of Apple’s iPod. iPod and iTune. intended but remains Unrealized Emergent strategy which arises from the grass roots of organization . including Napstar case (illegal downloads) and convergence of computer and entertainment industries. Tops Down Vs Bottom up Strategy Another issue with the current strategy planning is the bottom up strategy emergence. who sold a few thousands of units worldwide. new rules”. Market Vs Opportunity Share To illustrate this last point. a new space for Apple. which may remain unrealized Deliberate strategy. either intended or not Unrealized strategy. where resources are invested in Intended strategy Realized strategy. A combination of factors. that created a “new” industry definition. attracted Apple to introduce a whole new experience.

Importance of Strategy Execution Our Text Book starts with an example of AT&T. There are several key Global trends that are taking place as you review strategy and formulate a new one: • Inter-organizational networking • Accelerated product and process innovations • New technologies • Deregulations and liberalization • Globalization of product and financial markets • Higher consumer sophistication First part of strategy is strategic thinking. which is an indicative of how important strategy execution is. To sum it up: AT & T . less concerning than Execution . resulting from strategic analysis (of external and internal environments).1984 New Consumer Products division Strategic formulation.This chart shows how an intended strategy becomes unrealized and emergent strategy becomes realized: Impact of Environment As you can see from above discussion. though challenging task. Implementation deals at each level of the organization. which then leads to formulating strategies. one of the components that is critical in Strategy is Environment. It has been proven that Strategy Execution is the Key to consistently superior performance. implementation of Strategy is critical. Strategic thinking is not enough.

Integration simply means that a company’s strategies be tied to individual function level strategies and more importantly. To wrap up our “Introduction”. that is integrated. had a . let us take a real life example of a strategy planning process. a company can have difficulties as discussed in case of Maytag. Lacking this integration. which you will find in many other companies. functional level strategies be tied to each other. not execute Not integrative Silos “Grunts” handle execution Smart Vs Grunts Pay systems Ownership Execution takes longer than Planning Feedback system Execution is a process and not an action or step Planning and Execution Interdependency Integration This last point on Integration is important. The chart below shows a planning process of a large multinational company. to underscore the integrative aspect strategy. Culture Incentives and reward system Functional “silos” Managing Change Execution is a key to Success Making Strategy work is more difficult Why: Managers are trained to plan. This process used year after year.

very dismal. The results were as expected. . For now. Over the next 10 weeks. we will be discussing strategy and execution a lot.huge gap between strategy (which itself was not a good process) and execution. this is enough to get you started.

What is your business? What is your mission? What is your vision? 2. Competencies. When a business is successful. . How are you meeting your customers needs? Strategies? Products/services? Management guru Peter Drucker has best described the business basics in his paper called The Theory of the Business. it has made correct assumptions about all of these components. According to him. A business gets into trouble (like so many are today) when it fails to recognize (or ignores) changes in any of these three components.Business Basics Basics of the Business are simple: 1. Who is being satisfied? Industry? Markets? Customers? 3. and. Environment. What is being satisfied? What problems are you addressing? 4. you can break a business up in 3 components: Mission.

The core purpose is an idealistic reason for being. Most visionary goals fall into one of the following categories:  Target .quantitative or qualitative goals such as a sales target or Ford's goal to "democratize the automobile. “Why” The visionary goals are the lofty objectives that the firm's management decides to pursue.Mission/Vision What is Mission? Mission is all about making a difference in lives of our customer. Core purpose of the firm 3.” . The mission statement communicates the firm's core ideology and visionary goals. Core values to which the firm is committed 2. Visionary goals the firm will pursue to fulfill its mission The following are a few examples of values that some firms has chosen to be in their core: • excellent customer service • pioneering technology • creativity • integrity • social responsibility The core purpose is the reason that the firm exists. generally consisting of the following three components: 1.

 Role model . customers. It takes into account what markets. etc.”  Internal transformation . its capabilities. Last component in Drucker’s The Theory of the Business is a business’s competencies. a cycling accessories firm might strive to become "the Nike of the cycling industry. this will sound very basic! Management forgets about  Where does Revenues come from? How are they being impacted by changes in markets? Customers/ Competition? Etc.especially appropriate for very large corporations. assumptions made about these factors constantly change and if the business does not update their behavior (that is. The Theory of the Business can be summed up as follows:  Assumptions about Environment. Mission and Core Competencies Must Fit Reality  The assumptions in all Three Areas Have to Fit One  The Theory of the Business Must be Known and Understood Throughout the Organization  The Theory of the Business has to be Tested Constantly Another way to look at a business is P (profit) = R (revenue) – C (cost) Again. GE set the goal of becoming number one or number two in every market it serves. Drucker makes a good analysis of IBM and GM to make this very important point. Drucker’s second component deals with the Environment. For example. strengths and weaknesses. For example. model). their future needs.to become like another firm in a different industry or market.  Common enemy . Again.centered on overtaking a specific firm such as the 1950's goal of Philip-Morris to displace RJR.  What are different costs? How they being managed? Are costs in line with strategies? . it falls into difficult times. present & future competition.

There are generic strategies: cost-based advantage and differentiation. right skills. A good or winning strategy must be executable (i.) .There is an excellent book written by a well known consultant. Strategy is a management plan to take the company to where it wants to (objective) in light its resources (competencies) and environment (competition. http://www. grow through M&A. the company has right organization. .e. leadership. environmental factors. etc. These generic strategies can be further described based on market scope. As we started in our first week. It is all about creating and sustaining a competitive advantage . broad or narrow . . retrench/consolidate. A company’s strategy is a result of proactive actions (based on decisions from strategic analysis) and reactive actions resulting from in anticipated events. we will discuss at length strategic analysis (i.based advantage. Ram Charan. etc. suppliers) .com/gp/sitbv3/reader/103-0769303-3786265? asin=0609608398&pageID=S00J&checkSum=mGQQtGXmM9lIcPZ1t4K56uWTAnHW g1I/6Yyedi7VdZ4= In the next few sessions. . Text Book Chapter 1 Highlights . internal capabilities) which will enable an organization to consider what are the different options available for future course of actions. A good starting point is their annual reports and SEC submissions like 10-K. Strategy must be crafted ensuring its executability.amazon. You can go to this website and read an excerpt.). “What the CEO Wants You to Know: How your Company Really Works”. resources. customers. it needs to be periodically reviewed and crafted based on the environmental (external and internal) factors . you can look at a company’s financials and understand some of what the company is trying to do (grow organically.e. You can find out a company’s strategy reviewing its performance and actions. Strategy is never static.

Strategy is about establishing a strategic position. that is how it intends to make money. . and thus. There are many different business models like Razor-blade. They are essentially managerial tools to enhance competitiveness and are tactical. subscription based. . do read pages 12 – 13 for some basic review. A company’s business model is one way to understand its strategy. . Strategy making is often described as an entrepreneurial exercise. etc. it involves a risk taking attitude and it is a creativity process.Operational effectiveness (achieved through outsourcing. . it always based on certain level of risk (future is always unpredictable). advertising based. We will discuss these different models later in our class. but for now. Strategy making requires a continuous and constant process so as to respond to  Changing market conditions  Changing customer needs  New technologies  New production methods  Competitors moves  Political/regulatory changes  Etc. .) is NOT strategy. what is NOT a strategy: . Additional Points on “Strategy” Following points further emphasize what is strategy and more importantly. In many respects. reengineering. Strategy is future. service based. Great strategists have a keen eye to spot opportunities and also have a capacity to choose among many options. benchmarking. they are necessary but not sufficient. A manager’s challenge is to understand and manage these risks. etc.

. etc. for example. . is one companies are attempting to protect their advantages. Tradeoffs are very important: strategy is all about what to do and strategy is also all about what not to do . Leadership is very important in making sure that the above is accomplished . Through its understanding of where technology. services and consulting businesses worldwide. development and manufacture of the industry's most advanced information technologies. Constant upgrading of information technologies. storage systems and microelectronics. Operational effectiveness provides a base line to a strategic position. An Example: IBM The following is extracted from IBM’s Annual Report to illustrate how a company describes its Mission/Vision and strategies at different levels: Mission/Vision At IBM. . Southwest Airlines creating a new market: Budget Airlines. partners and in other relationships. We will cover this point in a more details as it is an important from the standpoint of integration and coordination among all parts of a firm. technology and research to maintain its leadership. software. IBM’s strategy is . services. we strive to lead in the invention.). client requirements and global business are headed. the company continually makes strategic decisions to maintain its leadership of this rapidly changing business by focusing on high-value innovation-based solutions and services while consistently generating high returns on invested capital for its shareholders. not of a single planning cycle. software. Strategy and Activities fit must be a dynamic one to protect a sustainable competitive advantage. a company must go well beyond to truly create a more permanent advantage (like Apple’s iPod.to continue refining its portfolio to achieve higher value. including computer systems.to pursue an innovation agenda with its clients. IBM’s strategic priorities for 2006 include (from Annual Report 2006): . Strategy is a set of UNIQUE activities and MUST tie them together. . Constantly rediscovering or reinventing to ensure a unique competitive position . . The company utilizes its entire portfolio — hardware. Strategic positioning should have a horizon of a decade or more. We translate these advanced technologies into value for our customers through our professional solutions.

as a platform to drive growth. business and social trends and the need of enterprises to innovate in addressing those trends. and advanced systems for supercomputing capability — including mainframes and “grid” networks. driving productivity gains and higher value in service delivery.Capitalizing on technological. including advanced semiconductor design and development. Back to your Assignment …. Acquiring businesses that contribute strategically to its portfolio. Continuing the global integration of IBM. collaborative intellectual capital. including Business Performance Transformation Services and emerging countries. and exiting businesses that no longer support its strategy for innovation and higher value. business process expertise and integration. . middleware software and services. Maintaining market-share leadership in systems. Focusing investment and resources on emerging growth areas. Furthering IBM’s leadership in innovation initiatives.

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