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Chapter 1

Introducing Strategic Management

OBJECTIVES

1 Understand what a strategy is and identify the difference between business-level and corporatelevel strategy Understand the relationship between strategy 2 formulation and implementation

3 Describe the determinants of competitive advantage
4 Recognize the difference between a fundamental and a dynamic competitive advantage 5 Understand why we study strategic management

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real estate services. investments. grows. sells off all non-retail businesses Acquired by KMart Expands into banking. expands into new markets (international) and store concepts (Sam’s clubs) Sam Walton opens first Wal-Mart with focus on low-prices Dizzying growth 1962 1970 1980 2000 Invests $500 million in inventory management technology 2 30 stores located in “one-horse towns which everybody else was ignoring”. Sam Walton . driven by endbased locations and companycontrolled factories Experts believe Sears way was the only way to compete “The paragon of retailers” 1970 1891 1924 Moves into on-premise retailing/General Robert Wood takes over 1960 1980 1990 2000 2005 A Firm’s performance is directly related to the quality of its strategy and its competency in implementing it Sears launches catalog business Takes control of production and distribution Financial trouble. and insurance Perfects model.A TALE OF TWO STORES Rapid growth.

2 billion Revenues 1980 Revenues 2004 Net profits 1980 Net profits 2004 Market capitalization 1980 Market capitalization 2004 $25.4% return on sales) USD 4.222 million $55 M(3.267 M (3.3% return on sales) $10.2 billion 3 .8 billion USD 12.194 million $36.TWO RETAILERS AT A GLANCE Sears Year founded Stores 1980 Stores 2004 1891 864 2026 Wal-Mart 1962 600 5289 $1.4% return on sales) 507M (-1.6% return on sales) USD 1 billion USD 200.100 million 606M (2.643 million $285.

A TALE OF TWO RETAILERS – PERFORMANCE MEASURES USD millions 4 .

but as an ongoing movie 5 . not as a snapshot. yet many managers give too little thought to implementation  Firms and industries are dynamic in nature  To succeed. the formulation of a good strategy and its implementation should be inextricably connected Strategic leadership is responsible for  making substantive resource allocation decisions and developing keystakeholder support of the strategy Strategic leadership is essential if a firm is able to both formulate and implement strategies that create value  We need to see a firm’s competitive position.THREE OVERARCHING THEMES Implementing a good strategy is at least as important as creating one.

. supply logistics infantry.STRATEGY Strategos: “the general’s view” Holistic “big picture” General Lower officer (e.g. heavy armored vehicles) Tactical details 6 .

integrated. externally oriented concept of how a firm will achieve its objectives 7 .THE STRATEGIC MANAGEMENT PROCESS Strategic analyses • Internal • External Strategy Vision and mission • Fundamental organizational purpose • • • • • Arenas Vehicles Differentiators Staging Economic logic Implementation levers and Strategic leadership • Organizational values The central.

QUESTIONS OF CORPORATE-LEVEL AND BUSINESS-LEVEL STRATEGY Unit of measure Corporate-level strategy should ask • In which markets do we compete today? • In which markets do we want to compete tomorrow? • How does our ownership of a business ensure its competitiveness today and in the future? Business-level strategy should ask ? • How do we compete in this market today? • How will we compete in this market in the future? ? 8 .

and processes 9 . systems.STRATEGY AND IMPLEMENTATION ITERATE WAL-MART EXAMPLE Strategy: The process of deciding what to do Compete as discount retailer in rural markets Leverage inventory and sourcing systems to be low-cost leader Implementation: The process of performing all the activities necessary to do what has been planned Invest heavily in organizational structure.

95% of Intel revenue came from the microprocessor segment Focus on microprocessor segment Unplanned experimental venture to make microprocessors for Busicom.UNPLANNED ACTIONS CAN DRIVE STRATEGY Intel’s original focus (1970s & 1980s) Design and manufacture of Dynamic. RandomAccess Memory Chips (DRAM) By 1984. a Japanese calculator maker 10 .

BUSINESS STRATEGY DIAMOND 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 – Which value-creation strategies? Vehicles Arenas Staging • What will be our speed and sequence of moves? – Speed of expansion? – Sequence of initiatives Economic logic Staging Economic logic Vehicles • How will we get there? – Internal development? – Joint ventures? – Licensing/franchising? – Experimentation? – Acquisitions? • 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? Differentiators Differentiators • How will we win? – Image? – Customization? – Price? – Styling? – Product reliability? – Speed to market? 11 .

PROFITABILITY AND MARKET VALUATION OF US AIRLINE INDUSTRY Profitability Market valuation 12 .

do not purchase a regional airline) • High level of service compared to low fare competitors Differentiators (e. satellite TV) • Grow from one route between two cities to serving 20 Strategy cities in just 3 years • Secure cost advantage by being willing and able to Economic logic perform key tasks differently – One type of plan – JFK home base – Secondary location 13 . leather seating.JET BLUE STRATEGY Arenas • Low fare commercial air carrier • Underserved but over-priced US cities • Start from scratch and achieve all growth Vehicles Objective To “bring humanity back to air travel” internally (i.e.g...

GOALS OF STRATEGY IMPLEMENTATION 1 To make sure strategy formulation is comprehensive and well informed 2 To translate good ideas into actions that can be executed (and sometimes to use execution to generate or identify good ideas) 14 .

. [But] more important and more difficult is to make effective the course of action decided upon. the decisions that really matter.IMPORTANCE OF EXECUTION “The important decisions.” – Peter Drucker 15 . are strategic . .

and resource-allocation decisions • Decision support among stakeholders 16 .FRAMEWORK FOR STRATEGY IMPLEMENTATION Key Factors of Strategy Implementation Implementation levers Intended Strategy • Organizational structure • Systems and processes • People and rewards Realized and Emergent Strategies Strategic leadership • Lever.

In addition. resource-allocation procedures. It includes the organization’s authority structure. Competitive advantage is generally tied to your human resources. rewards – how you pay your people – can accelerate the implementation of your strategy or undermine it 17 Systems and processes People and rewards . tasks. hierarchy. Successful implementation depends on having the right people and then developing and training them in ways that support the firm’s strategy. and people are organized. and coordinating mechanisms Systems are all the organizational processes and procedures used in daily operations. divisions. budgeting. units.IMPLEMENTATION LEVERS Implementation levers Organizational structure Description Structure is the manner in which responsibilities. information systems. and distribution The people and rewards lever points to the importance of using all organization members to implement a strategy. These include control and incentive systems.

COMPETITIVE ADVANTAGE Competitive Advantage: a Firm’s ability to create value in a way that its rivals cannot Key question: how do Firms create sustained above-average returns? 18 .

Companies should therefore either (1) position themselves to compete in attractive industries or (2) adopt strategies that will make their current industries more attractive Dynamic Suggests that in dynamic. Instead. a firm’s current market position is not an accurate prediction of future performance.THREE PERSPECTIVES OF COMPETITIVE ADVANTAGE Internal Often called the “resource view”. we look at the past for clues about how the firm arrived at its current position and to future trends – both internal and external – in an effort to predict the future landscape 19 . This advantage makes it relatively easier to achieve consistently higher levels of performance External Also called the “positional view”. contends that firms are heterogeneous bundles of resources and capabilities and firms with superior resources and capabilities enjoy competitive advantage over other firms. rapidly changing markets. contends that variations in a firm’s competitive advantage and performance are primarily a function of industry attractiveness.

SUMMARY 1 Understand what a strategy is and identify the difference between business-level and corporate-level strategy 2 Understand the relationship between strategy formulation and implementation 3 Describe the determinants of competitive advantage 4 Recognize the difference between a fundamental and a dynamic competitive advantage 5 Understand why we study strategic management 20 .

REVIEW QUESTIONS • What is strategic management? • What are the key components of the strategic management process? • How does business strategy differ from corporate strategy? • What is the relationship between strategy formulation and strategy implementation? • What are the five elements of the strategy-formulation – diamond model? • What are the internal and external perspectives on competitive advantage? • What are the fundamental and dynamic perspectives on competitive advantage? • Why should you study strategic management? ? 21 .

 Then select an example of a firm that fits your description.GROUP ACTIVITY  Identify the characteristics of a firm at which group members would like to work. construct a high-impact job-application cover letter.  What is the difference between business and corporate strategy at this firm?  How could this difference affect the experiences and opportunities that you might gain by working for this firm?  Finally. 22 . taking advantage of your insight into the firm’s strategy.

 Which markets should it target first and why?  How will international expansion be related to the firm’s business and corporate strategies? 23 .GROUP ACTIVITY  Identify a firm that may be thinking of expanding into new international markets.  Apply the staging element of the strategy diamond to the firm’s expansion opportunities or plans.