Economic Foundations of Strategy
description
Transcript of Economic Foundations of Strategy
Economic Economic Foundations of Foundations of StrategyStrategy
Power Point Set #2
2
The Wisdom of Choice:The Wisdom of Choice:
“To try and fail is at least to learn; to fail to try is to suffer the inestimable loss of what might have been.”
– Chester Barnard, The Functions of the Executive
3
What Is Strategic Management About?What Is Strategic Management About?
Understanding how firms create, capture, and sustain competitive advantage.
Analyzing strategic business situations and formulating strategic plans.
Implementing strategy and organizing the firm for strategic success.
4
What Is Strategic Management About?
Sustainable competitive advantage occurs when a firm implements an economic value-creating strategy of which other companies are unable to duplicate the benefits or find it too costly to imitate.
5
The Evolution of Strategic ManagementThe Evolution of Strategic Management
DOMINANTTHEME
MAINISSUES
CONCEPTS&
TECHNIQUES
IMPLEMENT-ATION
1950s 1960s Early-mid Late1970s Late 1980s Late 1990s1970s early 1980s early 1990s early 2000s
Budgetary Corporate Corporate Analysis of Quest for Strategicplanning & planning strategy industry & competitive innovationcontrol competition advantage The “New
Economy”Financial control Planning growth Diversifica- Positioning Competitive Innovation &
ion advantage knowledge
Budgeting Forecasting & Portfolio Analysis of Resource Dynamic project appraisal investment planning. industry & analysis. sources of
planning Synergy competition Case advantagemarket competences Knowledgeshare management
cooperation
Emphasis on Rise of Diversifi- Industry/market Restructuring Virtual orga-financial corporate planning cation. selectivity. BPR. nization.management departments Quest for Active asset Refocusing Alliances
& formal global management Outsourcing Quest forplanning market share critical mass
6
The Basic FrameworkStrategy: the Link between the
Firm and its Environment
The Basic FrameworkStrategy: the Link between the
Firm and its Environment
THE FIRM
Goals & Values
Resources &Capabilities
Structure & Systems
THE INDUSTRYENVIRONMENT
CompetitorsCustomersSuppliers
STRATEGYSTRATEGY
7
The Role of Strategy In Business is to Generate and Sustain Value The Role of Strategy In Business is to Generate and Sustain Value via the Linkages Between Position, Resources, and Organizationvia the Linkages Between Position, Resources, and Organization
Position
Resources& Capabilities Organization
8
PositioningPositioning
Scope of the Firm:
Geographic Scope
Choice of businesses (corporate portfolio analysis)
Product Market Positioning within a business
Vertical integration decisions
9
ResourcesResources
Tangible Resourcese.g., physical capital
Intangible Resourcese.g., trademarks, “know-how”
Organizational Capabilitiese.g., routines and standard operating procedures
10
OrganizationOrganization
StructureFormal Definition of authorityConflict Resolution
SystemsRules, Routines, Evaluation and rewards
ProcessesInformal communication, networks, recruitment
11
A Definition of StrategyA Definition of Strategy
Strategy (Quinn, 1980):
“The pattern or plan that integrates an organization’s major goals, policies, and action sequences into a cohesive whole. A well formulated strategy helps to marshal and allocate an organization’s resources into a unique and viable posture based on its relative internal competencies and shortcomings, anticipated changes in the environment , and contingent moves by intelligent opponents.”
12
Definitions of StrategyDefinitions of Strategy“The term “strategy” is intended to focus on the inter-dependence of the adversaries’ decisions and on their expectations about each other’s behavior.”
– Thomas Schelling The Strategy of Conflict
“Strategy can be defined as the determination of the basic long-term goals and objectives of an enterprise, and the adoption of courses of action and the allocation of resources necessary for carrying out those goals.”
– Alfred D. Chandler Strategy and Structure
13
Abell’s Framework for Defining the Business
Who is beingsatisfied?
Customer Groups
What is beingsatisfied?
Customer Needs
How arecustomer needs
satisfied?Distinctive
Competencies
Definitionof Business
14
Defining the Business: Defining the Business: The Starting PointThe Starting Point of Strategy of Strategy
Example: Fall of the Railroads
“They let others take customers away from them because they assumed themselves to be in the railroad business rather than in the transportation business. The reason they defined their industry wrong was because they were railroad oriented instead of transport oriented; they were product oriented instead of customer oriented.”
– Theodore Levitt “Market Myopia”
15
Mission Statement and GoalsMission Statement and GoalsIt is the function of the top management team to provide the firm’s purpose or “strategic intent.”
– Chester Barnard The Functions of the Executive
– Alfred Sloan My Years with General Motors
Komatsu ---> “Encircle Caterpillar”Canon ---> “Beat Xerox”Kodak ---> “Be the leader in the imaging sector”Coca Cola ---> “To put a Coke within ‘arms reach’ of every consumer in the world.”
16
Fundamental question of the choice of Goals: Planning for what purpose(s)?
Profitability (net profits)Efficiency (low costs)Market ShareGrowth (e.g., increase in total assets, sales, etc)Shareholder Wealth (dividends plus stock price appreciation)Utilization of Resources (e.g., ROE, ROI)ReputationContribution to Stakeholders (e.g., employees, society)Survival (avoid bankruptcy)
17
The Manager’s role in balancing expectations
Business Roundtable:“Balancing the shareholder’s expectations of maximum return against other priorities is one of the fundamental problems confronting corporate management.”
Understanding corporate strategy means understanding the competing value claims of multiple stakeholders.
18
The Manager’s role in balancing expectationsThe Manager’s role in balancing expectations
Stakeholders are the individuals and groups who can affect, and are affected by, the strategic outcomes achieved and who have enforceable claims on a firm’s performance.
19Copyright © 2001 Houghton Mifflin Company. All rights reserved. 2-2
FIGURE 2.1
Stakeholders and the EnterpriseStakeholders and the Enterprise
Contributions
Contributions
Inducements
Inducements
20
AA Key Performance Measure:Key Performance Measure:Sustainable Competitive AdvantageSustainable Competitive Advantage
For a company, the definition of success is superior economic performance.
To achieve superior economic performance, a firm has to create a sustainable competitive advantage (SCA).
SCA is achieved by a value-creating strategy that cannot be (easily) duplicated.
21
Key Drivers of Value Creation and Key Drivers of Value Creation and Sustainable Competitive Advantage:Sustainable Competitive Advantage:
Generating economic value can be accomplished through:
REVENUE drivers
COST drivers
RISK drivers
22
Sources of Superior Profitability
RATE OF PROFIT ABOVE THE
COMPETITIVE LEVEL
How do we make
money?
INDUSTRY
ATTRACTIVENESS
Which businesses
should we be in?
COMPETITIVE ADVANTAGE
How should we compete?
CORPORATE STRATEGY
BUSINESS STRATEGY
23
The Levels of StrategyThe Levels of Strategy
R&D
HR
Finance
Production
M ktg/Sales
D ivision A
R&D
HR
Finance
Production
M ktg/Sales
D ivision B
R&D
HR
Finance
Production
M ktg/Sales
D ivision C
C orpo rateH eadquarte rs
Corporate - General Electric
Business - Home Appliances
Functional - e.g., Production
24
Corporate StrategyCorporate Strategy
At the corporate level, value creation can occur if the individual parts of a firm are integrated into a coherent whole.
Corporate strategy is the way a company creates value through the configuration and coordination of its multi-market activities.
25
O u r L e a r n i n g G o a l s : P u s h i n g D o w n T h r o u g h B l o o m ’ s T a x o n o m yO u r L e a r n i n g G o a l s : P u s h i n g D o w n T h r o u g h B l o o m ’ s T a x o n o m y
1 . K n o w l e d g e : r e m e m b e r m a t e r i a l ; k n o w t e r m s , f a c t s , p r o c e d u r e s , b a s i c c o n c e p t s
2 . C o m p r e h e n s i o n : g r a s p m e a n i n g ; u n d e r s t a n d f a c t s , i n t e r p r e t c h a r t s , t r a n s l a t e v e r b a l t o m a t h e s t i m a t e c o n s e q u e n c e s
3 . A p p l i c a t i o n : u s e m a t e r i a l i n n e w s i t u a t i o n s ; a p p l y c o n c e p t s t o r e a l s i t u a t i o n s , f o l l o w a p r o c e d u r e
1 . K n o w l e d g e : r e m e m b e r m a t e r i a l ; k n o w t e r m s , f a c t s , p r o c e d u r e s , b a s i c c o n c e p t s
2 . C o m p r e h e n s i o n : g r a s p m e a n i n g ; u n d e r s t a n d f a c t s , i n t e r p r e t c h a r t s , t r a n s l a t e v e r b a l t o m a t h e s t i m a t e c o n s e q u e n c e s
3 . A p p l i c a t i o n : u s e m a t e r i a l i n n e w s i t u a t i o n s ; a p p l y c o n c e p t s t o r e a l s i t u a t i o n s , f o l l o w a p r o c e d u r e
4 . A n a l y s i s : b r e a k m a t e r i a l i n t o c o m p o n e n t s & u n d e r s t a n d s t r u c t u r e ; r e c o g n i z e l o g i c a l f a l l a c i e s , d i s t i n g u i s h f a c t a n d i n f e r e n c e , e v a l u a t e r e l e v a n c y o f d a t a
5 . S y n t h e s i s : i n t e g r a t e p a r t s t o m a k e a n e w w h o l e , i n t e g r a t e l e a r n i n g t o s o l v e a p r o b l e m
6 . E v a l u a t i o n s : j u d g e l o g i c a l c o n s i s t e n c y , j u d g e w h e t h e r c o n c l u s i o n s a r e s u p p o r t e d b y f a c t s
4 . A n a l y s i s : b r e a k m a t e r i a l i n t o c o m p o n e n t s & u n d e r s t a n d s t r u c t u r e ; r e c o g n i z e l o g i c a l f a l l a c i e s , d i s t i n g u i s h f a c t a n d i n f e r e n c e , e v a l u a t e r e l e v a n c y o f d a t a
5 . S y n t h e s i s : i n t e g r a t e p a r t s t o m a k e a n e w w h o l e , i n t e g r a t e l e a r n i n g t o s o l v e a p r o b l e m
6 . E v a l u a t i o n s : j u d g e l o g i c a l c o n s i s t e n c y , j u d g e w h e t h e r c o n c l u s i o n s a r e s u p p o r t e d b y f a c t s
26
Summary “Take-aways”:Providing PURPOSE is an important function for the executive.
One important purpose is to CREATE VALUE.
Value creation can lead to SUSTAINABLE COMPETITIVE ADVANTAGE.