Post on 21-Dec-2015
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Welcome to
Integrative Business StrategyIntegrative Business Strategy
MGS 4999
Dr. Joseph McGill
Kean U - Willis 105J908 737 4166 (O)
jmcgill@kean.edu
turbo.kean.edu/~jmcgill
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• Firm-level view – Integrative - crosses internal functions/units
– Fit – the firm in its environment
– LT performance
– LT (~irreversible) resource commitments
Business Strategy
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Learning Objectives
• Understand history/context of strategy
• Understand the goal of strategy• Understand strategy content• Understand strategy process
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Business Strategy antecedents
• Ancient Greece - military term Στρατηγικός: the army’s leader
• von Clausewitz – strategy is emergent• Strategy appears in both business and
military fields in mid-19th century America. • West Point graduates implemented what they
learned: – in the Civil War (developed the Staff Office)– in business in the 1850s
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– Why is it that some firms perform well over time relative to competitors, while other firms fail?
– Who are the stakeholders relative to firm performance (e.g., managers, owners, investors, employees, customers, suppliers, …)?
– What drives business performance (value creation)?
• We will learn to apply strategic management “toolkits” to identify issues, evaluate alternatives, and choose & implement actions.
Business Strategy questions
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Business Strategy
• 1959 – Ford foundation report on business schools > reform the curriculum!
• Apply analytical models, e.g., game theory.
• Move beyond neoclassical economics
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Industry
Quantity of Corn in Millions of Bushels
83
(b)
$1.87
Pri
cepe
rB
ushe
l
S2
M
S2 D
D
(2,075 firms)
Industry
Quantity of Corn in Millions of Bushels
83
(b)
$1.87
Pri
cepe
rB
ushe
l
S2
M
S2 D
D
(2,075 firms)
Neoclassical economics Neoclassical economics LONGLONG--RUN EQUILIBRIUM RUN EQUILIBRIUM -- FIRM AND INDUSTRYFIRM AND INDUSTRY
Quantity of Corn in Thousands of Bushels
40
(a)
$1.87
Pri
cepe
rB
ushe
l
D2
MCFirm
AC
m
Quantity of Corn in Thousands of Bushels
40
(a)
$1.87
Pri
cepe
rB
ushe
l
D2
MCFirm
AC
m
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The FactsAnalysis of 8,000 US businesses 81-97:• 19% sustained high performers. • 20% chronic under-performers.• 41% steady moderate performers. • 10% declining performers. • 10% improving performers.
McGahan,California management review, 1999
• NB Recent McKinsey research notes that sustainable success is now rarer than 20%.
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Industry profitability 1987-1996
Source: Hawawini, Subramanian, & Verdin. Strategic Management Journal (2003)
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Why are there performance differences among firms?
• Concentration of market power, monopoly positions ? (Bain)
• Opportunistic innovation? (Schumpeter)
• Efficiency through vertical integration?
• Efficiency through control of transaction costs? (Williamson)
• Capability to learn & adapt continuously
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Drivers of performance (brief version)
• Desire - some firms seek dominance (e.g. Newscorp, WalMart, Canon, Dell, Sony)– National competition - firms may be protected
from the forces of competition (‘national champions’ for example)
• Ability– To identify a valuable opportunity. – To innovate & protect the innovation (others see
it and are attracted by first mover success). – To leverage firm-specific capabilities and
resources.
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Alaska Gold Mine(You have 14 days)
Option Min Time Max Time OutcomePersonal
Risk#1 (wait 3-4 weeks)
#2 (over top)
#3 (valley)
#4 (wait 3 days)
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Alaska Gold Mine(You have 14 days)
Option Min Time Max Time OutcomePersonal
Risk#1 (wait 3-4 weeks)
No $$$ None
#2 (over top)
#3 (valley)
#4 (wait 3 days)
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Alaska Gold Mine(You have 14 days)
Option Min Time Max Time OutcomePersonal
Risk#1 (wait 3-4 weeks)
No $$$s None
#2 (over top)
7 days 10 days For sure$$$s
Life
#3 (valley)
#4 (wait 3 days)
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Alaska Gold Mine(You have 14 days)
Option Min Time Max Time OutcomePersonal
Risk
#1 (wait 3-4 weeks)
No $$$s None
#2 (over top)
7 days 10 days For sure$$$s
Life
#3 (valley)
14 days 21 days Maybe$$$s
None
#4 (wait 3 days)
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Alaska Gold Mine(You have 14 days)
#3 (valley)
14 days 21 days Maybe$$$s
None
#4 (wait 3 days)
10-13 daysto top
17-24 daysto valley
Yes, if topLose, if storm
None
Option Min Time Max Time OutcomePersonal
Risk
#1(wait 3-4 weeks)
No $$$s None
#2(over top)
7 days 10 days For sure$$$s
Life
#3(valley)
14 days 21 days Maybe$$$s
None
#4(wait 3 days)
10-13 daysto top
17-24 daysto valley
Yes, if topLose, if storm
None
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The Alaska Gold Mine(You have 14 days)
(wait 3 days)to top to valley Lose, if storm None
#5 What if walk for 3 days?
IF STORM Keep walking, same as option #3IF NO STORM Turn back (total 6 days) + over top (7-10 days) 13 - 16 days
Option Min Time Max Time OutcomePersonal
Risk
#1(wait 3-4 weeks)
No $$$s None
#2(over top)
7 days 10 days For sure$$$s
Life
#3(valley)
14 days 21 days Maybe$$$s
None
#4(wait 3 days)
10-13 daysto top
17-24 daysto valley
Yes, if topLose, if storm None
#5 What if walk for 3 days?
IF STORM Keep walking, same as option #3IF NO STORM Turn back (total 6 days) + over top (7-10 days) 13 - 16 days
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The Environment -“Threats & OpportunitiesThreats & Opportunities”
Management’s values & attitude toward risk
Organization’s capabilities -““Strengths & Weaknesses”Strengths & Weaknesses”
STRATEGY
GOAL
Strategy Formulation
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The Environment -“Threats & Opportunities”
Management’s values & attitude toward risk
Organization’s capabilities -“Strengths & Weaknesses”
STRATEGY
GOAL
Strategic Management Process
Performance
Execution/Implementation
Control
Feedback
Comm
unicatio
n
Monitor & Measure
Formulation Implementation
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More specifically …StrategyStrategy consists of organization-wide commitments and actions required for a firm to exploit its competencies, gain competitive advantage, and earn above-average returns
*commitments - long term (irreversible) commitments
*actions - involving substantial creation, acquisition, or redeployment of resources
*competitive advantage(s) – competitors are unable to copy/imitate
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Terms
Returns equal to those an investor expects to earn from other investments with a similar amount of risk
Average (or “accounting”) returns
Returns from firm-specific strategies that
competitors are not simultaneously implementing
Above-Average (or “economic”) returns
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Limited sources of value creation
• Strategies• Structures/business models• Products/processes• Resource/capability creation• Resource/capability combination• New marketsBut …good business ideas are hard to
find!
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The Strategic Management Process
1.1. Strategic PlanningStrategic Planning
2.2. Scenario PlanningScenario Planning
3.3. Strategy as Planned EmergenceStrategy as Planned Emergence
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Strategy as Planning
•Top-down rational planningTop-down rational planning
– Define mission/vision/goal (strategic intent)Define mission/vision/goal (strategic intent)
– External analysis: opportunities and threatsExternal analysis: opportunities and threats
– Internal analysis: strengths and weaknessesInternal analysis: strengths and weaknesses
– Create strategic fit through SWOTCreate strategic fit through SWOT
– Formulate appropriate strategyFormulate appropriate strategy
– Implement chosen strategyImplement chosen strategy
– Monitor performance & modify if necessaryMonitor performance & modify if necessary
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Strategy as Scenario Planning
Envision different "what-if" plansEnvision different "what-if" plans
Generate a dominant plan Generate a dominant plan
– Must Must implementimplement the most probable option the most probable option
Keeps other scenarios in the event of Keeps other scenarios in the event of
changes… changes…
• "Arab Spring" impact on the oil industry?"Arab Spring" impact on the oil industry?
• Tablets/mobility impact on the PC industryTablets/mobility impact on the PC industry
– Good example of the AFI frameworkGood example of the AFI framework
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Strategy as Planned Emergence
• Strategic InitiativeStrategic Initiative– Google 50% from the "20% rule" Google 50% from the "20% rule" – Enron wind investment…Enron wind investment…
• Mintzberg Planned EmergenceMintzberg Planned Emergence• Strategy can come from top or bottom Strategy can come from top or bottom
– Some intended strategies drop off in the processSome intended strategies drop off in the process– Allows for new emerging ideas to become realizedAllows for new emerging ideas to become realized– Resource allocation process (RAP)Resource allocation process (RAP)– Serendipity can have dramatic effectsSerendipity can have dramatic effects
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Fundamental nature of competition is
changing
Competitive Landscape
Hypercompetition
Dynamics of strategic maneuvering among global and innovative combatants
Price-quality positioning, new know-how, first mover
Protect or invade established product or geographic markets
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Fundamental nature of competition is
changing
Hypercompetitive Hypercompetitive environmentsenvironments
Competitive Landscape
Emergence of global
economy
Goods, services, people, skills, and ideas move freely across geographic borders.Spread of economic innovations around the world.
Political and cultural adjustments are required.
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Fundamental nature of competition is
changing
Hypercompetitive Hypercompetitive environmentsenvironments
Competitive Landscape
Emergence of global
economy
Rapid technological
change
Increasing rate of technological change and diffusion
The information age
Increasing knowledge intensity
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Strategic flexibility?
How can a firm develop dynamic capabilities in response to perpetually turbulent and uncertain competitive environments?
Can firms change? (i.e., success breeds failure)?
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StrategicFlexibilityStrategic
Flexibility
Strategic Flexibility
StrategicStrategicflexibilityflexibility
StrategicStrategicreorientationreorientation
Capacity toCapacity tolearnlearn
OrganizationalOrganizationalslackslack
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1. Strategy dictated by the external environments of the firm (what opportunities exist in these environments?)
2. Firm develops internal skills required by external environment (what can the firm do about the opportunities?)
GeneralGeneral
EnvironmentEnvironment
GlobalGlobal
TechnologicalTechnological
Eco
nom
ic
Eco
nom
ic
Socio
cultu
ral
Socio
cultu
ral
Politi
cal/Le
gal
Politi
cal/Le
gal D
em
ogra
phic
Dem
ogra
phic
1. External Environments
Industry Environment
Competitor Environment
I/O Model of Above-Average Returns
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Four Assumptions of the I/O Model
1.External environment creates pressures and constraints that determine the strategies that would result in above-average returns (deterministic)
2.Most firms competing within a particular segment are assumed to control similar strategically relevant resources and to pursue similar strategies in light of those resources
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Four Assumptions of the I/O Model
3.Resources used to implement strategies are highly mobile across firms
4.Organizational decision makers are assumed to be rational and committed to acting in the firm’s best interests, as shown by their profit-maximizing behaviors
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Industrial Organization
Model
I/O Model of Above-Average Returns
1. Study the external environment, especially the industry environment•economies of scale•barriers to market
entry•diversification•product
differentiation•degree of
concentration of firms in the industry
The External Environment
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I/O Model of Above-Average Returns
2. Locate an attractive industry with a high potential for above-average returns
Attractive industry: one whose structural characteristics suggest above-average returns
Industrial Organization
ModelThe External Environment
An Attractive Industry
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I/O Model of Above-Average Returns
3. Identify the strategy called for by the attractive industry to earn above-average returns
Strategy formulation: selection of a strategy linked with above-average returns in a particular industry
Industrial Organization
ModelThe External Environment
An Attractive Industry
Strategy Formulation
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I/O Model of Above-Average Returns
4. Develop or acquire assets and skills needed to implement the strategy
Assets and skills: those assets and skills required to implement a chosen strategy
Industrial Organization
ModelThe External Environment
An Attractive Industry
Strategy Formulation
Assets and Skills
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I/O Model of Above-Average Returns
5. Use the firm’s strengths (its developed or acquired assets and skills) to implement the strategy
Strategy implementation: select strategic actions linked with effective implementation of the chosen strategy
Industrial Organization
ModelThe External Environment
An Attractive Industry
Strategy Formulation
Assets and Skills
Strategy Implementation
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I/O Model of Above-Average Returns
Industrial Industrial Organization Organization
ModelModelThe External EnvironmentThe External Environment
An Attractive IndustryAn Attractive Industry
Strategy FormulationStrategy Formulation
Assets and SkillsAssets and Skills
Strategy ImplementationStrategy Implementation
Superior ReturnsSuperior Returns
Superior returns: Superior returns: earning of above-earning of above-average returnsaverage returns
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1.Strategy dictated by unique resources and capabilities of the firm (what can the firm do best?)
2.Find an environment in which to exploit these assets (where are the best opportunities?)
Resource-based Model of Above Average Returns
1. Firm’s Resources
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1. Identify the firm’s resources-- strengths and weaknesses compared with competitors
Resources: assets (tangible or intangible) used in delivering products or services
Resource-based Process
Resource-based Model
Resources
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2. Determine the firm’s capabilities--what it can do better than its competitors
Capability: how resources are managed and integrated in the delivery of a product or service
Resource-based Process
Resource-based Model
Resources
Capability
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Four Attributes of Resources and Capabilities (Competitive Advantage)
the firm is organized appropriately to obtain the full benefits of the resources in order to realize a competitive advantage
Valuable allow the firm to exploit opportunities or neutralize threats in its external environment
Rare possessed by few, if any, current and potential competitors
Costly to imitate when other firms cannot obtain them or must obtain them at a much higher cost
Nonsubstitutable
Reso
urc
es
an
d C
ap
ab
iliti
es
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Core Competencies
Resources and capabilities that meet these four criteria become
a source of:
Valuable
Rare
Costly to imitate
Nonsubstitutable
Core Competencies
Reso
urc
es
an
d C
ap
ab
iliti
es
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Core Competencies are the basis for a firm’s
Competitive advantage
Strategic competitiveness
Ability to earn above-
average returns
Core Competencies
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3. Determine the potential of the firm’s resources and capabilities in terms of a competitive advantageCompetitive advantage: ability of a firm to outperform its rivals in the creation of value.
Resource-based Process
Resource-based Model
Resources
Capability
Competitive Advantage
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4. Locate an attractive industry
An attractive industry is one with opportunities that can be uniquely exploited by the firm’s resources and capabilities
Resource-based Process
Resource-based Model
Resources
Capability
Competitive Advantage
An Attractive Industry
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5. Select a strategy that best allows the firm to utilize resources and capabilities (that are superior to its rivals) relative to opportunities in the external environment
Strategy formulation and implementation: strategic actions taken to earn above average returns
Resource-based Process
Resource-based Model
Resources
Capability
Competitive Advantage
An Attractive Industry
Strategy Form/Impl
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Resource-based Model of Above Average Returns
Resource-based Model
Resources
Capability
Competitive Advantage
An Attractive Industry
Strategy Form/Impl
Superior Returns
Superior returns: earning of above-average returns
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Strategic Intent
What is forming strategic intent? • Identifying a desired position in
the long term that far exceeds a company's current resources and capabilities
• E.g., Sony, Komatsu (encircle Caterpillar) , Canon (beat Xerox)
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Strategic Intent
The resources required to realize the strategy may not be available initially
Intent is about seeing the end state and deciding how to leverage internal resources, capabilities, and core competencies in a “staged” approach
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MissionFundamental question of Goal Choice: • Profitability (net profits)• Efficiency (low costs)• Market Share• Growth (e.g., ^ in total assets, sales, etc)• Shareholder Wealth (dividends plus stock price
appreciation)• Utilization of Resources (e.g., ROE, ROI)• Reputation• Contribution to Stakeholders (e.g., employees,
society)• Survival (avoid bankruptcy)
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MissionIntel Corp. • From product orientation …
– To be the pre-eminent building block supplier of the PC industry
– To be the pre-eminent building block supplier of the Internet economy
• To customer orientation …– Delight our customers, employees, and shareholders
by relentlessly delivering the platform and technology advancements that become essential to the way we work and live
• But…what links a firm’s mission statement with competitive advantage?
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Strategy Process
• Strategic Planning
• Scenario Planning
• Strategy as “Planned Emergence”
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Strategy ProcessRational Planning• Define mission, vision, goals (strategic intent)• External analysis - opportunities and threats• Internal analysis of strengths and weaknesses• Create strategic fit through SWOT• Formulate appropriate strategy• Implement chosen strategy• Monitor performance & modify if necessary
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Strategy Process
Scenario planning • Envision different "what-if" plans
– Generates a dominant plan
• Implement the most probable option – Keep other scenarios in the event of
changes… – "Arab Spring" impact on the oil industry?
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Strategy ProcessScenario Planning - The future cannot be
known, e.g., • UPS, FedEx, AirTran, Delta …
– How to compete if the barrel of oil costs $35 or $200?
• Boeing, Harley-Davidson, Caterpillar …– How to compete if 1 euro = $2 or $1 = 75
yen• How to obtain capital when credit markets
are frozen?• Tendency however is not to think about
pessimistic scenarios
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Strategy Process
Emergent Strategy• Strategy can come from top or bottom • Some intended strategies drop off in the
process, new ideas realized• Resource reallocation required• Sometimes deliberate – Real Options• Serendipity can have dramatic effects• Technological innovation |≠| success
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Groups who are affected by a firm’s performance and who have claims on its wealth
The firm must maintain performance at an adequate level in order to retain the participation of key stakeholders
The Firm and Its Stakeholders
Stakeholders
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Capital Markets
Critical dependency: Stakeholders
Shareholders (institutional ownership most active)
Major suppliers of capital
•Banks•Private lenders•Venture capitalists
Stakeholders Provide Resources
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Capital Markets
Product MarketsPrimary customersSuppliersHost communities & regulatory bodiesUnions
Stakeholders Provide Resources
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Capital Markets
Product Markets
OrganizationalEmployeesManagersNonmanagers
Stakeholders Provide Resources
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Stakeholder Involvement
Two issues affect the extent of stakeholder involvement in the firm
How do you divide the returns to keep stakeholders involved?
E.g., Compensate employees? Increase dividends? Increase product value?
1
Capital Market
Product Market
Organizational
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Stakeholder Involvement
Two issues affect the extent of stakeholder involvement in the firm
How do you increase the returns so everyone has more to share?
2
Capital Market
Product Market
Organizational
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Some financial metrics
Profitability: important to Shareholders and Senior Managers
Shareholders: ROE - return on equity Dividend Yield
Senior Mgrs: ROA - return on assets Expense RatiosROS - return on sales Profit Margin
Liquidity: Impt to Lenders
Current RatioDebt/Equity RatioQuick Ratio
Efficiency: Internal Usage
Accounts Receivable TurnoverInventory Turns
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Cases• Describe actual situations
– Forces you to choose among different options and plan implementation actions
• Cases include background events and supporting materials– Financial statements– Operational data – Product lists– Transcripts of interviews with employees
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Case Skills • Evaluate
– multiple aspects of a business situation – differentiate significant factors – deal with uncertainty, missing information
• Envision – explanations not readily apparent– outcomes of decisions
• Integrate/Synthesize– understand firm-level effects – interdependencies
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Case Analysis• Put yourself “inside” the case
– Strategic decision maker– Board member– Outside consultant
• Purpose is to diagnose problems and find solutions. Unravel the case material. – Background/Problem Statement 10-20%– Strategic Analysis/Options 60-75
%– Recommendations/Action Plan 10-20%