Strategic Management

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Strategic Management
Education is the best provision for old
age. Aristotle

• BU601A Class 6
• Instructor Steve Hummel, P. Eng.

Stephen J. Hummel, P. Eng.
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Agenda
Excellence is an art won by training and
habituation. We do not act rightly because we
have virtue or excellence, but we rather have
those because we have acted rightly. We are what
we repeatedly do. Excellence, then, is not an act
but a habit. Aristotle

• Recap of Fifth Class
• News!
• What is Strategy?
• Organization
• Victoria Heavy Equipment

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News! (Organization)

• HP names ex-SAP chief Apotheker as CEO
• The news comes as something of a surprise. HP was
  expected to go with an insider for the new CEO
  after the last two CEOs Hurd and his
  predecessor, Carly Fiorina, both outsiders when
  they were hired clashed with the board and were
  forced out
• Shares of HP were briefly halted after the stock
  market closed. When after-hours trading resumed,
  the stock sank 1.37, or 3.3 percent, to 40.70
• Rocky economy can't derail train company
• Rocky Mountaineer s a British Columbia-based,
  family-owned luxury train line, which offers
  travel through some of the most spectacular
  scenery in Western Canada. As a premium priced
  travel brand, the company was forced to reexamine
  how it did business during the recent economic
  downturn, which caused an industry-wide reduction
  in discretionary consumer spending
• During this time, other prestige train travel
  companies around the world experienced major
  volume and revenue declines, and competitors such
  as cruise lines resorted to heavy discounting in
  an attempt to bolster business
• The Rocky Mountaineer management team did not
  panic. Instead, they went back to their core
  brand values, and did further research to better
  understand their core target customer, and
  motivations for choosing a multi-day,
  premium-priced, unique travel experience
• Perhaps the most daring and successful element of
  the campaign involved the innovative partnership
  with ABCs The Bachelorette TV show, which put
  Rocky Mountaineer in the spotlight during two
  episodes in June 2009. This greatly raised
  awareness and interest in the important US
  market

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Michael Porter

• What is Strategy?
• If all you're trying to do is essentially the
  same thing as your rivals, then it's unlikely
  that you'll be very successful. Michael Porter

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Operational effectiveness is not strategy

• The rules have changed, management must be more
  flexible to respond rapidly to competitive and
  market changes
• Benchmarking to achieve best practices and
  outsourcing to gain efficiencies are critical
• This must be done while nurturing a few core
  competencies to stay ahead of rivals
• There has been great frustration by companies
  that have tried to implement TQA, Lean, 6 Sigma,
  etc. in an effort to turn these management
  techniques into a sustainable advantage
• The reality is that if you push to improve on all
  operational fronts you move further from viable
  competitive positions

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Operational Effectiveness Necessary but not
Sufficient

• A company can outperform rivals only if it can
  establish a difference that it can preserve
• It must deliver greater value to customers or
  create comparable value at lower cost, or do both
• The math is simple, high value means higher
  average prices, greater efficiency means lower
  average unit costs
• Cost advantage arises from performing particular
  activities better than competitors
• Differentiation arises from both the choice of
  activities and how they are performed
• Bottom line, overall advantage/disadvantage
  results from all a companys activities, not only
  a few

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O.E. Contd

• Operational Effectiveness means performing
  similar activities better than rivals perform
  them
• Not limited to just efficiency
• Defect reduction or fast cycle product
  development are other examples
• Heart of Japanese industrial revival, low cost
  with superior quality
• The productivity frontier is the sum of all
  current best practices
• Note that it changes outward all the time
• Note the role of disruptive technologies
• Watch out, best practices can be diffused!
• A very real danger of competitive convergence!
• A dramatic result is zero-sum competition,
  static/declining prices, and pressures on costs
  that compromise the ability to invest for the
  long term

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Strategy Rests on Unique Activities

• Strategic Positioning means performing different
  activities from rivals or performing similar
  activities in different ways
• Strategic Positions emerge from three distinct
  sources
• Variety based positioning
• Based on the choice of product or service
  varieties rather than customer segments
• Makes sense when a company can best produce
  particular products or services using distinctive
  sets of activities
• Needs based positioning
• Based on serving most or all the needs of a
  particular group of customers
• Traditional approach
• Arises when there are groups of customers with
  differing needs and when a tailored set of
  activities can serve those needs best
• Critical element is differences in needs are
  matched by differences in the best set of
  activities to satisfy them
• Access based positioning
• Can be a function of customer geography or
  customer scale, anything that requires a
  different set of activities to reach customers
  the best way
• Less common approach

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A Sustainable Strategic Position Requires
Trade-offs

• Strategy is the creation of a unique and valuable
  position, involving a different set of activities
• If there were only one ideal position there would
  be no need for strategy
• The essence of strategic positioning is to choose
  activities that are different from rivals
• This is no guarantee of sustainable success
• Competitors can reposition themselves
• Competitors can straddle you (matches you while
  maintaining old position)
• Trade-offs are the essence of sustainability
• Avoiding inconsistencies in image and reputation
• Different activities require different equipment,
  infrastructure, people, etc.
• Limits on internal coordination and control
  (priority management)

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Trade-offs Contd

• Simultaneous improvement of cost and
  differentiation is only possible when a company
  begins far behind the productivity frontier or
  when the frontier shifts dramatically outward
  (disruptive technologies)
• At the frontier, the trade-off between cost and
  differentiation is very real
• The essence of strategy is often choosing what
  not to do!

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Fit Drives Both Competitive Advantage and
Sustainability

• Operational effectiveness is about achieving
  excellence in individual activities or functions,
  strategy is about combining activities
• Types of fit
• First order fit is simple consistency between
  each activity/function and the overall strategy
• Second order fit is when the activities are
  reinforcing
• Third order fit is optimization of effort
• Bottom line
• The whole matters more than any individual part
• Competitive advantage grows out of the entire
  system of activities
• Great fit reduces cost or dramatically improves
  differentiation
• It is harder for a rival to match interlocked
  activities
• Use the simple probability model
• The greater the order of fit the tougher it is
  for a competitor to mimic
• Fit means that poor performance in one activity
  will degrade the performance in others, and, vice
  versa

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Rediscovering Strategy

• The failure to choose
• When many companies operate far from the
  productivity frontier trade-offs appear
  unnecessary, why not improve on all fronts all at
  once?
• Managers are pushed to imitate competitors and
  pursue bleeding edge technology
• Managers avoid thinking about strategy because it
  requires dealing with the professional and
  personal implications of trade-offs
• Growth is good, any growth is better than no
  growth, so lets go!
• The growth trap
• Desire to please all dilutes strategy
• Compromises and inconsistencies erode core
  strategy
• Pursuit of revenue versus profits

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Rediscovering Strategy Contd

• Profitable growth
• Best way is to deepen strategic position rather
  than broadening and compromising it
• Look for extensions of the strategy that leverage
  the existing activity system by offering features
  or services that rivals would find impossible or
  costly to match on a stand-alone basis
• Globalization is often a viable alternative
• Growing within your industry by broadening is
  best accomplished by standalone business units
  but there is always the temptation to consolidate
• Role of leadership
• Strong leaders willing to make choices is
  necessary
• Make the trade-offs, forge fit are the essential
  elements!
• Discipline, coaching, and daily reinforcement of
  the strategy is necessary

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Bottom Line

• The operational agenda involves continual
  improvement where there are no trade-offs
• The operational agenda is all about continuous
  improvement, flexibility, change, and the pursuit
  of best practices
• The strategic agenda is all about defining a
  unique position, making clear trade-offs and
  tightening fit
• The strategic agenda demand continual search for
  ways to reinforce and extend the companys
  position while maintaining discipline and
  continuity
• Strategic continuity actually makes an
  organizations continuous improvement program
  more effective
• Today, be careful about the role of disruptive
  technologies!

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What is Strategy?Summary Basics

• Position
• Strategic Position
• Position as a niche
• Position as focused or broad
• Activities
• Fit
• Between position and activities
• Among activities
• Tradeoffs
• Regarding position
• Regarding activities

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Strategy and Organization

• The focus of this chapter is organizational
  capabilities, this means what people are
  collectively capable of when they work together
• Four questions need to be answered
• What organizational capabilities would you need
  in order to implement the strategic proposal that
  you are considering?
• What are the gaps between these needed
  organizational capabilities and the capabilities
  that you currently have?
• What changes would you need to make in
  organization structure, management processes, and
  leadership behaviour to develop the
  organizational capabilities that you would need
  to fill these gaps?
• Would these changes in fact lead to the
  development of the new capabilities in the time
  available?

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Organizational Capabilities

• New strategies usually require that new things be
  done well
• Common capabilities usually include speed,
  simplicity, and self confidence
• Welchs thoughts about boundarylessness
• Most successful small companies possess three
  defining cultural traits Self-confidence,
  simplicity, and speed. We wanted them. We went
  after them. (Jack Welch, CEO, GE, 1995 Annual
  Report)
• We began to cultivate self-confidence among our
  leaders by turning them loose, giving them
  independence and resources, and encouraging them
  to take big swings. (Jack Welch, Ch, CEO, GE,
  1995 Annual Report)
• Capabilities are based upon behaviour of
  employees which in turn is influenced and
  supported by the culture of the organization

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Organizational Capabilities

• Organization turns a resource into a capability.
• Types of capability
• Innovation
• Productivity
• Speed
• Cross Cultural effectiveness
• Cross Unit synergies

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Organizational Capabilities Model

• Key Points
• Any changes need to be sending the same message
  in terms of behavior change.
• Changes need to be consistent over time.

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Behaviour

• We are talking about readily observable
  behaviour, not aspects of peoples actions that
  would require a trained psychologist to notice
• This usually means
• How much energy people put into various aspects
  of their jobs
• How subordinates are managed
• How much attention is given to external issues
• How people relate to one another
• The rub comes when comparing current behaviour to
  required behaviour with a new strategy and the
  implications in terms of the changes in culture

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Culture

• Culture is the shared beliefs and expectations
  that managers have about the way the organization
  should operate
• In organizations with a strong culture the
  beliefs are widely shared and strongly held, the
  opposite is true
• Try to describe current culture with phrases that
  people use and then compare that to the culture
  that you need to have for your strategy to
  succeed to see if you have a gap
• Note that culture pushes inward, towards
  behaviour and capabilities, but also outward
  influencing choices about structure, management
  processes, and leadership behaviour

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Step 1 Identify Required Organizational
Capabilities

• Table 8.4, Pg. 154 text
• Implement new goals
• Implement new value proposition
• Implement new product market focus
• Implement new core activities
• Close resource gaps
• Close management preferences gaps
• Tricks are
• Be as specific as you can about the capabilities
  that you will need (SMAC, Specific, Measurable,
  Actionable, Consistent)
• Cast a wide net
• Get everyone involved
• Deal with management conflict

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Step 2 Identify Capability Gaps

• Be careful to avoid flattering assessments of
  your capabilities
• Know how good you are not!
• Involve others
• After all, do you want to do all the work?
• How easy is it to implement if everyone agrees on
  the gaps?
• Remember comparisons are all relative
• Be sensitive to uniqueness!
• Capture the value of it!

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Step 3 Develop New Organizational Capabilities

• The 3 leverage points to do this are
• Organizational structure
• Management processes
• Leadership behaviour
• Organizational structure
• There are always trade-offs
• Information/influence flows smoother vertically
  than horizontally (Management Law of Gravity),
  this must be overcome
• Active encouragement is often required to support
  informal communication pipelines
• Four common organizational structures are
  functional, product, geographic, and matrix

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Organization Structure Alternatives
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More Structure

• Functional structure
• Only GM is responsible for profitability
• Good for coordinating activities and allocating
  resources
• Good for standardized products, especially
  globally on the cost front
• Bad for lack of sensitivity to local markets
• Problems with slow decision making and poor
  coordination between functional areas
• Trick to making it work is to get informal
  networks in place, big companies do this by
  continuous transfers
• Product structure
• Good for organizations that have multiple
  products, helps to focus on the profitability of
  each major product line
• There is a cost of duplication versus functional
• There is also a danger that one division may not
  communicate with other divisions with respect to
  best practices, etc.
• Potential customer impact if customers are buying
  from more than one division

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Yet More Structure

• Geographic structure
• Advantage is strong local knowledge
• Disadvantage is global inefficiency
• New emerging trend of global product divisions
  versus traditional geographic structure in an
  effort to capture overall benefits while
  mitigating weaknesses
• Matrix structure
• Encourages managers to pay attention to local and
  worldwide product strategies
• They are very complex and slow moving
• Responsibility and authority are diffused and
  power balances are not clear cut

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Organization Structure

• Align required capabilities with organization
  characteristics.
• Ref Goold and Campbell nine tests. ( Page 165)

Organization Type
Benefits
Issues
Limited sensitivity to
Standard product -
Functional
local markets
Efficiencies
Slow decision making
Lose Efficiencies
Focus on each product
Product
Multiple contact points
line
for customers.
Good at tailoring to local
Geographical
Lose Efficiencies
markets
Complex and Slow
Matrix
Efficient and Effective
moving.
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Alternatives

• Strategic alliances
• This is a way to extend/develop your
  organizational capabilities
• Barneys seven inter-firm synergies that can
  motivate strategic alliances
• Exploiting economies of scale
• Learning from competitors
• Managing risks/sharing costs
• Facilitating tacit collusion
• Low cost entry into new markets
• Low cost entry into new industries/new industry
  segments
• Managing uncertainty
• Barneys three ways that alliances break down
• Adverse selection (misrepresentation of skills)
• Moral hazard (skills contributed at a lower level
  than promised)
• Hold-up (investments made specific to alliance
  with no economic value outside the relationship,
  vulnerable to unreasonable demands)

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Choosing a Structure

• Goold and Campbells nine tests
• The market advantage test Does your design
  direct sufficient management attention to your
  sources of competitive advantage in each market?
• The parenting advantage test Does your design
  help the corporate parent add value to the
  organization?
• The people test Does your design reflect the
  strengths, weaknesses, and motivations of your
  people?
• The feasibility test Have you taken account of
  all the constraints that may impeded the
  implementation of your design?
• The specialist cultures test Does your design
  protect units that need distinct cultures?
• The difficult links test Does your design
  provide coordination solutions for the
  unit-to-unit links that are likely to be
  problematic?
• The redundant hierarchy test Does your design
  have too many parent levels and units?
• The accountability test Does your design support
  effective controls?
• The flexibility test Does your design facilitate
  the development of new strategies and provide the
  flexibility required to adapt to change?

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Management Processes

• Three major processes
• Decision making
• Operating
• Performance/reward
• Decision making processes
• Who makes decisions, what information do they
  have, how are decisions actually made
• Real-time companies have agility baked in!
• Systems that supply and demand info are reliable
  and fast
• Vision, values, strategy are all drilled in

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More Process Thoughts

• Operating processes
• Govern the way that your people work together to
  create, produce, and deliver products/services to
  your customers
• The issue is often coordination
• This can be accomplished informally with
  mechanisms like people rotation or formally by
  creating dedicated cross-functional work groups
• Performance Assessment and Reward processes
• It is not just about the money
• Each person has a different capability level
• Recommend that you combine this with other
  changes, like that of leadership behaviour

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Leadership Behaviour

• Easiest, fastest thing to change to generate a
  greater/improved/different organizational
  capability
• Objectively examine if you have the right leaders
• If your organization is has a strong culture then
  you likely need to make changes on all three
  leverage points, make sure that these changes are
  consistent!

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Step 4 Assess Feasibility

• Two questions remain
• Can the changes required be made in the needed
  time frame?
• Will the changes required product the desired
  result?
• For those managers that do not buy in then you
  must deal with them!

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Creating a Change Plan
Analysis of Starting Conditions
Urgency Are you dealing with anticipatory, reactive, or crisis change? Organizational Readiness Who will be most affected by the proposed change? How ready are they? Personal Readiness How ready are you to lead the change process?
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Establishing Guidelines for Action
Priority Objective What do you need to accomplish first? Priority Targets and Actions Who are your priority targets? What will your first steps be? Leadership Style How are you going to manage the change process? Pace How fast do you need to move?
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Creating an Action Plan
Period 1, etc. Objective Targets First Steps Style Timing
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Change Agenda

• You have completed the Diamond-E and chosen your
  preferred strategic option
• This also means that you have identified your new
  resources, management preferences, and
  organizational capabilities
• You may have also determined how you are going to
  change behaviour in the organization
• First step is to generate the change agenda as
  behavioural change is often the toughest to make
  happen

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Change Agenda, Change Needs Identified in
Diamond-E Analysis
Non-Behavioural Changes Required Behavioural Changes Required Potential Changes in Organization
Develop New Resources
Change Management Preferences
Develop New Organizational Capabilities
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Closing the Gaps
Considerations
Risks
Magnitude of Changes

• Gaps too great to fill

Method of change
Number of Changes

• Too many gaps to fill

Cost of change

• Lack sufficient time to make the change
• Lack the skills needed to manage the change

Types of Changes
Ease of change
Cost of Changes

• Costs too much for what it accomplishes

Timing of change
Productivity of Changes

• Will not do what is needed

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Urgency for Action The Crisis Curve
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Readiness for Change and Strategic Capability
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Change Issues

• Crisis Change
• Buy time, financially
• Depleted resources
• Blow your own preconceived notions away
• Make do with the talent that you have
• Anticipatory Change
• Problem is not clear
• Lack of a sense of urgency
• Premium on credibility
• Reactive Change
• Concentrate attention on the core business,
  focus!
• You need the power to make it happen, now!

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Organizational Readiness for Change

• Target Group Identification
• Identify the change, those that can be your force
  multiplier
• Target Group Readiness
• Make sure that the change agents are committed
  and capable

Personal Readiness for Change

• Make sure that you are both committed and
  capable, be realistic!

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Assessing Potential Priority Targets
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Case Victoria Heavy Equipment Limited

• Victoria is a family owned firm which as been led
  by an ambitious, entrepreneurial CEO who now want
  to take a less active role. The firm has been
  through two re-organizations in recent years and
  performance has declined to a 4 year low. This
  case focuses on the organizational and strategic
  issues which will need to be addressed by
  management.
• Lay out the likely qualifications for the new
  president.
• Assess firm performance.
• What are the major elements of Victorias
  strategy and organization?
• How easy or difficult is this firm to change
  organizationally? Why?
• What are your recommendations?

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Lessons

• Realistic and achievable goals drive belief
• Co-ordinating the organization is critical
• When in trouble, centralize fixed cost control
• Do not design the organization to be everything
  to everyone
• When evaluating family members for succession
  give them equal responsibilities
• Be prepared to live with the implications of your
  decisions