Basic Principles Basic Principles of Strategic Managementof Strategic Management

Review for Final – Review for Final – Business 189Business 189

Stuff that’s worth Stuff that’s worth rememberingremembering

Distinctive competenceDistinctive competence

Very important strengthsVery important strengths, unique , unique to the particular firm, that create to the particular firm, that create competitive advantagecompetitive advantage• Built from resources and capabilitiesBuilt from resources and capabilities

Resource = Resource = possessions of the firm possessions of the firm • Tangible – factoriesTangible – factories• Intangible – brand namesIntangible – brand names

Capability = skills at putting resources to Capability = skills at putting resources to productive useproductive use

A A competencecompetence = a bundle of = a bundle of resources and capabilities that does resources and capabilities that does something something fundamental fundamental and and hard to imitatehard to imitate

A competence is said to be A competence is said to be distinctivedistinctive when it gives or has when it gives or has clear potential to give the firm clear potential to give the firm competitive advantagecompetitive advantage

Strategies – actions and plans to Strategies – actions and plans to attain one or more business goals attain one or more business goals

Levels of strategyLevels of strategy

Corporate level Corporate level • What businessesWhat businesses should we be in? should we be in? • What are our What are our basic attitudesbasic attitudes to them? to them?

Business level Business level • Strategy for a unit that operatesStrategy for a unit that operates

an an entire businessentire business Functional level Functional level

• Strategy for a unit that performs a Strategy for a unit that performs a particular functionparticular function for a business unit for a business unit (or (or for the organization as a whole)for the organization as a whole)

Business people spend most time Business people spend most time at business & functional levelsat business & functional levels

The critical goal is usually The critical goal is usually competitive advantagecompetitive advantage• Higher returns than others in their Higher returns than others in their

industryindustry The ultimate goal is The ultimate goal is sustained sustained

competitive advantagecompetitive advantage• For this, hard-to-imitate competencies For this, hard-to-imitate competencies

are criticalare critical

Business modelBusiness model

Management’s theory of how it will attain Management’s theory of how it will attain competitive advantage competitive advantage • Or, especially when considering corporate-level Or, especially when considering corporate-level

strategy, simply strategy, simply high profitshigh profits

The basic modelThe basic model

Good business model Good strategies Distinctive

competences you can defend

High profits –Higher return

than competitors

Deliberate vs. emergent strategyDeliberate vs. emergent strategy

Emergent strategy = actions that happen Emergent strategy = actions that happen without planningwithout planning

Deliberate strategy can be considered in Deliberate strategy can be considered in terms of terms of • Strategy formulationStrategy formulation• Strategy implementationStrategy implementation

Strategic IntentStrategic Intent

Big goalBig goal Widely shared at all levels in the Widely shared at all levels in the

organizationorganization Pursued for a long periodPursued for a long period

• with both deliberate and emergent with both deliberate and emergent strategiesstrategies

Internal analysisInternal analysis

Value creation Value creation

Cost, including cost of capital

Profit margin

Price

Value to customer

Consumer surplus

Value chainValue chain

The distinctive competence can be The distinctive competence can be anywhere on the value chainanywhere on the value chain• In primary activities or support activitiesIn primary activities or support activities

Barriers to imitationBarriers to imitation• Very diverseVery diverse• But capabilities that are hard to explain But capabilities that are hard to explain

are typically hard to imitateare typically hard to imitate

InertiaInertia Icarus paradoxIcarus paradox

External analysisExternal analysis

Industry – firm and its close Industry – firm and its close competitorscompetitors• Sector Sector • SegmentSegment

Stages in industry evolutionStages in industry evolution 5-forces analysis5-forces analysis

GlobalizationGlobalization The competitive advantages of The competitive advantages of

national industriesnational industries• Factor endowmentsFactor endowments• Demand conditionsDemand conditions• Related and supporting industriesRelated and supporting industries• Rivalry Rivalry

Measuring successMeasuring success

Return on invested capitalReturn on invested capital Return on equityReturn on equity

Those are the central ideasThose are the central ideas

The rest of the course examined The rest of the course examined issues in issues in • Functional level strategy Functional level strategy • Business-level strategyBusiness-level strategy• Technology strategyTechnology strategy• Global strategyGlobal strategy• Corporate strategyCorporate strategy• Managed changeManaged change• Corporate governance Corporate governance • Ethics Ethics

Issues in functional-level strategyIssues in functional-level strategy

Economies of scaleEconomies of scale The The experience curve experience curve – –

a combination of a combination of • Economies of scale Economies of scale andand• Learning effects Learning effects

Issues in business-level strategyIssues in business-level strategy

Product/service differentiationProduct/service differentiation Market segmentationMarket segmentation Generic strategiesGeneric strategies

• Cost leadershipCost leadership• DifferentiationDifferentiation• FocusFocus

Focused cost leadershipFocused cost leadership Focused differentiationFocused differentiation

Pursuing Pursuing bothboth cost leadership cost leadership andand differentiationdifferentiation• Difficulties (“stuck in the middle”)Difficulties (“stuck in the middle”)• Possible benefitsPossible benefits

Strategic groupsStrategic groups Game theory – look forward / reason Game theory – look forward / reason

backback

Issues in technology industriesIssues in technology industries

StandardsStandards Setting standardsSetting standards Strategies for winning format warsStrategies for winning format wars

• Killer applicationsKiller applications• Razor and bladeRazor and blade• Cooperation with competitorsCooperation with competitors

Costs in high tech industriesCosts in high tech industries

First-mover advantages, First-mover advantages, disadvantagesdisadvantages

Disruptive technology – why existing Disruptive technology – why existing firms neglect new technology that firms neglect new technology that produces cheap productsproduces cheap products

Global strategiesGlobal strategies

Basic choices of strategiesBasic choices of strategies• International strategy – transferring International strategy – transferring

existing competences abroadexisting competences abroad• Multidomestic strategy – responsiveness Multidomestic strategy – responsiveness

everywhereeverywhere• Global strategy – cost reductions Global strategy – cost reductions

through centralizationthrough centralization• Transnational strategy – seeking Transnational strategy – seeking

simultaneous simultaneous cost reductions, cost reductions, competency transfer, responsivenesscompetency transfer, responsiveness

I did not prepare slides on corporate I did not prepare slides on corporate strategy because I thought slides could not strategy because I thought slides could not easily summarize it. easily summarize it.

However, lecture notes on corporate However, lecture notes on corporate strategy are on the web site – strategy are on the web site – • Click on Business 189, then Lecture Notes, Click on Business 189, then Lecture Notes,

then then Section 18: Corporate Strategy 1.Section 18: Corporate Strategy 1. Note the diagrams I planned to put on the Board are Note the diagrams I planned to put on the Board are

at the end of the fileat the end of the file Section 19: Corporate Strategy 2Section 19: Corporate Strategy 2 may also be helpful. may also be helpful.

A basic change processA basic change process

UnfreezeUnfreeze Movement Movement Refreeze Refreeze

Key issues in corporate Key issues in corporate governancegovernance

StakeholdersStakeholders• InternalInternal• ExternalExternal

Stockholders (the owners)Stockholders (the owners) The agency problemThe agency problem

• Information assymetryInformation assymetry Corporate governanceCorporate governance

• Annual meetingAnnual meeting• Board of DirectorsBoard of Directors• Stock optionsStock options• Takeover threatsTakeover threats

Ethical decision – one a reasonable Ethical decision – one a reasonable stakeholder can supportstakeholder can support

Unethical decision – one you’d prefer Unethical decision – one you’d prefer to hideto hide