Chapter 1 Introducing Strategic Management

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Chapter 1Introducing Strategic Management
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OBJECTIVES
Understand what a strategy is and identify the
difference between business-level and
corporate-level strategy
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Understand the relationship between strategy
formulation and implementation
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Describe the determinants of competitive advantage
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Recognize the difference between a fundamental
and a dynamic competitive advantage
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Understand why we study strategic management
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A TALE OF TWO STORES
Experts believe Sears way was the only way to
compete The paragon of retailers
Sears launches catalog business
Acquired by KMart
1970
1891
1990
2005
1924
1960
2000
1980
Moves into on-premise retailing/General Robert
Wood takes over
Sam Walton opens first Wal-Mart with focus on
low-prices
1970
1962
2000
1980
30 stores located in one-horse towns which
everybody else was ignoring Sam Walton
Invests 500 million in inventory management
technology
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TWO RETAILERS AT A GLANCE
Sears
Wal-Mart
Year founded
1891
1962
600 5289
Stores 1980 Stores 2004
864 2026
1,643 million 285,222 million
Revenues 1980 Revenues 2004
25,194 million 36,100 million
606M (2.4 return on sales) 507M (-1.4 return on
sales)
55 M(3.3 return on sales) 10,267 M
(3.6 return on sales)
Net profits 1980 Net profits 2004
Market capitalization 1980 Market capitalization
2004
USD 4.8 billion USD 12.2 billion
USD 1 billion USD 200.2 billion
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A TALE OF TWO RETAILERS PERFORMANCE MEASURES
USD millions
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THREE OVERARCHING THEMES
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Implementing a good strategy is at least as
important as creating 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

To succeed, the formulationof a good strategy an
d its implementa-tion should be inextricably
connected
Firms and industries are dynamic in nature
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Strategic leader-ship is essential if a firm is
able to both formulate and imple-ment strategies
that create value
We need to see a firms competitive position, not
as a snapshot, but as an ongoing movie
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STRATEGY
Strategos the generals view
Holistic big picture
General
Lower officer (e.g., supply logistics infantry,
heavy armored vehicles)
Tactical details
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THE STRATEGIC MANAGEMENT PROCESS
Strategic analyses

• Internal
• External

Strategy
Vision and mission

• Arenas
• Vehicles
• Differentiators
• Staging
• Economic logic

Implementation levers and Strategic leaders
hip

• Fundamental organizational purpose
• Organizational values

The central, integrated, externally oriented
concept of how a firm will achieve its objectives
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QUESTIONS OF CORPORATE-LEVEL AND BUSINESS-LEVEL
STRATEGY
Unit of measure
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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?

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Business-level strategy should ask

• How do we compete in this market today?
• How will we compete in this market in the future?

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STRATEGY AND IMPLEMENTATION ITERATE
WAL-MART EXAMPLE
Compete as discount retailer in rural markets
Leverage inventory and sourcing systems to be
low-cost leader
Strategy The process of deciding what to do
Implementation The process of performing all the
activities necessary to do what has been planned
Invest heavily in organizational structure,
systems, and processes
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UNPLANNED ACTIONS CAN DRIVE STRATEGY
Intels original focus (1970s 1980s)
Design and manufacture of Dynamic, Random-Access
Memory Chips (DRAM)
Unplanned experimental venture to make
microprocessors for Busicom, a Japanese
calculator maker
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BUSINESS STRATEGY DIAMOND
Arenas
Economic logic
Staging
Vehicles
Differentiators
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PROFITABILITY AND MARKET VALUATION OF US AIRLINE
INDUSTRY
Profitability
Market valuation
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JET BLUE STRATEGY

• Low fare commercial air carrier
• Underserved but over-priced US cities

Arenas

• Start from scratch and achieve all growth
  internally (i.e., do not purchase a regional
  airline)

Vehicles

• High level of service compared to low fare
  competitors (e.g., leather seating, satellite TV)

Differentiators

• Grow from one route between two cities to serving
  20 cities in just 3 years

Strategy

• Secure cost advantage by being willing and able
  to perform key tasks differently
  
• One type of plan
• JFK home base
• Secondary location

Economic logic
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GOALS OF STRATEGY IMPLEMENTATION
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IMPORTANCE OF EXECUTION
The important decisions, the decisions that
really matter, are strategic . . . But more
important and more difficult is to make effective
the course of action decided upon.
Peter Drucker
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FRAMEWORK FOR STRATEGY IMPLEMENTATION
Key Factors of Strategy Implementation

• Implementation levers
• Organizational structure
• Systems and processes
• People and rewards

Realized and Emergent Strategies
Intended Strategy

• Strategic leadership
• Lever- and resource-allocation decisions
• Decision support among stakeholders

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IMPLEMENTATION LEVERS
Implementationlevers
Description
Structure is the manner in which
responsibilities, tasks, and people are
organized. It includes the organizations
authority structure, hierarchy, units, divisions,
and coordinating mechanisms
Organizationalstructure
Systems are all the organizational processes and
procedures usedin daily operations. These
include control and incentive systems,
resource-allocation procedures, information
systems, budgeting,and distribution
Systems andprocesses
The people and rewards lever points to the
importance of using all organization members to
implement a strategy. Competitive advantage is
generally tied to your human resources.
Successful implementation depends on having the
right people and then developing and training
them in ways that support the firms strategy. In
addition, rewards how you pay your people can
accelerate the implementation of your strategy or
undermine it
People andrewards
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COMPETITIVE ADVANTAGE
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THREE PERSPECTIVES OF COMPETITIVE ADVANTAGE
Dynamic
Internal
External
Suggests that in dynamic, rapidly changing
markets, a firms current market position is not
an accurate prediction of future performance.
Instead, 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
Often called the resource view, contends that
firms are heterogeneous bundles of resources and
capabilities and firms with superior resources
and capabilities enjoy competitive advantage over
other firms. This advantage makes it relatively
easier to achieve consistently higher levels of
performance
Also called the positional view, contends that
variations in a firms competitive advantage and
performance are primarily a function of industry
attractiveness. Companies should therefore
either (1) position themselves to compete in
attractive industries or (2) adopt strategies
that will make their current industries more
attractive
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SUMMARY
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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?

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GROUP ACTIVITY

• Identify the characteristics of a firm at which
  group members would like to work.
  
• Then select an example of a firm that fits your
  description.
  
• 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, taking advantage of your insight into
  the firms strategy, construct a high-impact
  job-application cover letter.

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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 firms expansion opportunities or plans.
  
  
• Which markets should it target first and why?
• How will international expansion be related to
  the firms business and corporate strategies?