Chapter 13

Strategic Planning and Control

 Lecture outline
• Designing a strategy
 Main determinants of strategy
 Generic strategies: cost leadership & product differentiation
• Implementing the strategy
 “Bad implementation” and “bad strategy” problems
 Balanced Scorecard
 Why do we care?
To achieve and sustain above-average profitability,
you MUST have
• a coherent, well-designed strategy
AND
• successful implementation of the strategy
Designing a Strategy
 Strategy
Strategy = a firm’s approach for creating value for customers,
which in turn creates profits for the firm
• What you do
HOW EXACTLY you do the things that you do
• What you do NOT do

e.g.,

Value for consumers =

To be able to charge low prices, Walmart must have lower costs than
competitors. They achieve lower costs by running a very efficient
global supply chain, state-of-the-art inventory management, etc. The
strategy is built around efficiency improvement and cost reduction in
all areas of operations.
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 Strategy

Three key questions in strategy design:

• What can you do better than competitors?
(“core competencies and capabilities”)
• What does your industry or market look like?
How should you position yourself in the market?
(“competitive landscape”)
• Are you protected from imitation in the long run?
(“sustainability” of the strategy)

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 What can you do better than
competitors?
Core competencies and capabilities of a firm = key skills and
expertise that give the firm a competitive advantage relative to
other firms

What are the core competencies and capabilities for Walmart and Apple?
Walmart Apple
high-end product design skills  
efficient inventory management skills  
marketing skills to position products as  
cool and cutting-edge
efficient supply chain management skills  
superior customer service skills  

Build the strategy around your core competencies and capabilities

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 What does the industry or market look like?
Competitive Landscape
The Five Forces that determine industry profitability
1. Industry competitors
Who are the major competitors? What can they do well? Is there product
differentiation? How intense is the price competition?
2. Threat from new entrants
How likely is entry by new firms? Are there barriers to entry? How much
of a threat do potential entrants pose?
3. Threat from substitute products
e.g., the internet is a substitute that killed most of the newspaper
industry
4. Bargaining power of suppliers
i.e., their ability to charge high prices for the inputs that they supply
5. Bargaining power of customers
i.e., their ability to reduce the price that they pay for your product

Analysis of the 5 forces helps you decide:

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 Should you be in this industry at all?
 Are you protected from imitation in the
long run? Sustainability of strategy
If your strategy is successful, other firms will try to imitate you
• if they can easily imitate your strategy, then they will gradually take away
your sales and profits

A sustainable strategy is hard for competitors to imitate

(=> you can sustain high profits in the long run)

Two ways to prevent imitation and build a sustainable strategy:

 a strategy built around unique resources (e.g., patents, unique R&D
and design capability) that cannot be acquired easily by other firms
 a well-designed strategy in which different pieces fit together very well
and reinforce each other (e.g., Southwest example later)
 To successfully imitate such a strategy, you must imitate ALL of its pieces.
This is extremely difficult.

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 Two Generic Strategies
Two distinct types of business strategy:
 Cost leadership: lower costs than competitors
 Low costs => can charge lower prices than competitors to gain
market share, and can be profitable at these low prices
 Stay ahead of competition by relentlessly improving the efficiency of
operations and finding new ways to reduce costs
 E.g., Walmart, contract manufacturers like Foxconn
 Product differentiation: superior products or services
 Superior products => can charge higher prices than competitors
without losing market share, and can be profitable at these prices
even though costs are relatively high
 Stay ahead of competition by being quicker to develop the next
generation of products or by providing superior customer
experience
 E.g., Apple

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 Exercise: Generic Strategies
Which strategy do the following firms use?
Cost Product
leadership differentiation

 

 

 

 

 

 
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 Generic Strategies and DuPont
Decomposition
Recall the DuPont decomposition from Ch 12:
ROI = profit margin × asset turnover
Under which generic strategy do we expect higher profit
margin? Higher asset turnover?
Cost Product
leadership differentiation
profit margin  low  high  low  high
asset turnover  low  high  low  high

Firm X reports a profit margin of 2% and asset turnover of 10.

The firm’s strategy is
 cost leadership
 product differentiation
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 Example of a Successful Strategy

A low-cost airline whose strategy is built around very careful

choices of what they do and what they do NOT do, and HOW
they do the things they do:
 point-to-point service (not a hub-and-spoke network)
 serves midsize cities and secondary airports in large cities
(e.g., Chicago Midway – not Chicago O’Hare!)
 no assigned seats, no premium classes of service
 standardized fleet of 737-s
etc
(from Michael Porter, “What is Strategy?”)

Which strategy does Southwest follow?

 cost leadership  product differentiation
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 Different parts of the strategy reinforce each other

14 source: Michael Porter “What is Strategy?”, Harvard Business Review

 Implementing the Strategy
“9 out of 10 companies fail to execute their strategies”
(Fortune Magazine)

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 Implementing Strategy
Two key questions in strategy implementation:
• Are we implementing the strategy well?
• Is the (well-implemented) strategy working as expected?
E.g.: Your strategy emphasizes quality. You believe that if you increase
employee training, then product quality will improve. If product quality improves,
then consumers will buy more units at a higher price, which will increase profit.
The strategy failed. In each of the following scenarios, do you have a
“bad implementation” problem or a “bad strategy” problem?
bad bad
implementation strategy
Due to scheduling mix-ups, employees did not receive
any additional training  
Quality did not improve because employees received a
wrong type of training  
Quality did not improve because quality problems are
caused by defective components and not by employees  
Product quality improved but consumers do not buy more
units because they do not care about quality  
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 What Should We Measure?
• Focus on critical success factors – performance measures
that the firm MUST get right for its strategy to be successful
Identify critical success factors for Walmart and Apple.
Walmart Apple
customer perception that you offer
 
good value for the money
customer perception that your
 
products are cool and cutting-edge
high supply chain efficiency  
high customer satisfaction  
process innovation to reduce costs  
• Both cutting-edge
financial andproduct innovation
non-financial 
performance 
measures
(e.g., customer satisfaction, market share, % defective items, employee
turnover, % of repeat purchases)

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 Balanced Scorecard

Balanced scorecard – a strategic performance management

system that translates the strategy into:
(1) specific performance measures
(2) cause-and-effect relations between these measures
=>
 can measure how well we are implementing the strategy
 can test whether the cause-effect relations are working as expected
(i.e., even if implemented perfectly, is the strategy working?)
 can communicate strategy to lower-level employees in terms of clear
performance targets

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 Four Perspectives Of Balanced Scorecard

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 Four Perspectives of Balanced Scorecard
• Financial perspective: financial impact of the firm’s strategy
e.g., return on equity, EVA, ROI, RI
• Customer perspective: customer perceptions of the firm
e.g., customer satisfaction, number of complaints, market share,
customer retention rate
• Internal business perspective: efficiency and effectiveness
of critical business processes within the firm
e.g., cost per transaction, production efficiency, % defective
output, employee retention
• Innovation and Learning perspective:
e.g., number of new innovations, time-to-market for new products,
employee training

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 Example: Strategy Map and Balanced
Scorecard for a regional airline
e.g., strategy in words: “We aim to provide superior customer experience and at
the same time improve our cost structure by investing in the human capital of our
employees. This will improve our market share and profitability, creating value for
shareholders.”
return on investment

revenue per seat

Specific cause-and-effect # customers

relations that we expect
based on the strategy
customer satisfaction
(aka “strategy map”)

% on-time arrivals

time on the ground

% ground crews trained

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 (continued) Strategy Map and Balanced
scorecard for a regional airline
Same strategy, translated into specific performance measures and numerical
targets on the Balanced Scorecard:

perspective Performance measure Target

Financial ROI 10%
revenue per seat 5% increase
Customer customer satisfaction 95% positive
# of customers 5% increase
Internal % on-time arrival 80%
business time on ground <30 minutes
Innovation and % ground crews trained 95%
learning

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