4490IntroductionWhatIsStrategy (1) for the course.pdf

Strategy

1. Learning
Objectives
Dr. Nilesh Khare
[email protected]
What is Strategy?
What is Competitive Advantage?

2. Top performers in retail industry consistently
outperformed S&P 500 over decades
Such success is often attributed to
GOOD STRATEGY

3. Business Strategy
•Target: Single Business and Market
Firm
International Strategy
•Wal*Mart: Single Business, Multiple
Markets
Corporate Strategy
•GE: Operates in multiple product
markets
Some have created this success in a single business,
others have done so with multiple businesses

4. Such success is often attributed to
GOOD STRATEGY!
But what is it?
What's your definition of strategy?
Define Strategy

5. The word “strategy”is derived
from the Greek word
‘strategus’:art of the general.
Thoughts on Strategy…
It’s like a game of chess…
Opponents, resources,
moves and counter-moves,
win-lose game

6. •Perspective: Vision and Mission
•Plan: series of pre-thought
actions with specified sequence
and timing
•Pattern: Goals, Objectives and
Actions
•Position: Relative to competitors
Some other thoughts on strategy…
HeneryMintzberg
CleghornProfessor of
Management Studies
McGill University,
Montreal

7. Business lingo has transformed marketing into
marketing strategy, data processing into IT
strategy, acquisitions into growth strategy. Cut
prices and you have a low-price strategy…
… I don’t mean most of the things people call
strategy—
mission statements,
audacious goals, e.g. market share
three to five-year budget plans…
McKinsey Quarterly, 2009, Number 1
… Some More Thoughts on Strategy
Richard P
Rumelt
Harry and Elsa Kunin
Chair in Business and
Society
UCLA Anderson School
of Management

8. Six blind men and an Elephant
What is strategy, really?

9. “The role of the Chief Strategy Officer
(CSO) is poorly defined, much like the
discipline of strategy itself…”.
McKinsey Quarterly, 2008
Professionals echo to same sentiments
Of confusion surrounding the use of word strategy
Dan Simpson
Vice President, CSO
Office of the Chairman
at Clorox

10. “…By strategy, I mean a cohesive response to a
challenge...”
Strategy in structural breaks by Richard P Rumelt,
McKinsey Quarterly, 2009, Number 1
What is Strategy?
Richard P Rumelt
Harry and Elsa KuninChair
in Business and Society
UCLA Anderson School of
Management
http://www.youtube.com/watch?v=43kZDnyDXOc&feature=related

11. “…the set of goal-directed actions a firm takes to
gain and sustain superior performance relative
to competitors” –Rothaermelchap 1
What is strategy?...A theory for superior performance
… not a rule
“…doing different things or things differently that
involve tradeoffs ...”
Michael E. Porter
“…A firm’s theoryabout how to gain and sustain
competitive advantage...”
Jay B. Barney

12. Cohesive response represents theory about
Competitive advantage that guides actions
“We built our company by focusing upon a
pretty simple, but focused premiseof
Quality, Service, Cleanliness, and Value.”
-Ray Kroc,
Founder of McDonalds

13. •Key challenges areto (i) deliver Quality,
Service, Cleanlinessand Valuetogether (ii)
Consistently, and (iii) in a Scalable way
•Cohesive responseis the guiding
policy/theory—operation, and franchising, and
brand
•Response orchestrated by way of consistent
actionsthat competitors cannot match (as
effectively and/or efficiently)
Cohesive response represents theory about
Competitive advantage that guides actions

14. •Strategy is linked to a firm’s performance.
•Word Strategy has been used in variety of
ways. And some of them may or may not be
connected with performance.
•Strategy is a theoryof how to gain and sustain
competitive advantageprescribing cohesive
response to a challenge
So far…

15. What is Competitive Advantage?

16. The ability to create more economic value than
competitors
What is Competitive Advantage?
WTP
Total Cost
WTP
Total Cost
WTP
Total Cost
WTP
Total Cost
Differentiation
Greater WTP
Cost Leadership
Lower Total Cost
Integration
Lower TCP
Greater WTP
Avg. Competitor
Or the marginal
player
In the industry

17. A firm can out perform its rival only by one of the
three ways:
1.Differentiation:Delivering greater value to
customers at comparable costs
•Target
2.Cost Leadership: Creating comparable value at
a lower cost
•Wal*Mart
3.Integration:Do both 1 and 2 above
•Toyota
Generic Strategies and the ways to create
Competitive advantage

18. 1.Competitive advantage leads to above normal
economic returns
CompetitiveAdvantage EconomicReturns
Advantage Above Normal
•Exceeding expectations
Parity Normal
•Meeting expectations
Disadvantage Below Normal
•Failing expectations

19. The ability to create more economic value than competitors
WTP WTP
Total Cost
WTP
Total Cost
2.Competitive advantage… is not about pricing..
It is about wedge between WTP and TCP
Differentiation
Greater WTP
Cost Leadership
Lower Total Cost
P1
Vf1
P2
Vf2
Vc2
Vc3
Vf3
P3
Total Cost
Avg. Competitor
Or the marginal player
In the industry

20. 3.Competitive advantage is hard to gain and
its harder to sustain: Stuck in the middle
JetBlue: “Stuck in the Middle”?
•Jet Blue started off by copying SWA low cost model. And was
successful in the beginning
•It ran into trouble by trying to combine two different strategies–
low cost and differentiation--simultaneously.
•Despite enjoying some early years of competitive advantage,
JetBlue is struggling to maintain that edge.
•Some companies such as Toyota enjoyed both types of advantages

21. 4.Competitive Advantage and Profit
Maximization: Implications
•Aim of the business is to maximize long term profit
П = R –C
oStudy relative WTP drivers–greater WTP enables charging higher
prices (R).
oExamine how does a firm can increase WTP without commensurate
increase in the cost: Quality, Brand, Reliability, Service, Experience,
Convenience etc.
oStudy relative C drivers–lower cost allows to charge power prices
oExamine how a firm lowers cost without sacrificing WTP: Economies
of scale, Experience Curve, Preferred access to raw material,
Technology, Economies of scope

22. 1.How and why do some firms outperform others?
•How do firms create/gain competitive advantage?
2.How and why do some firms sustain their superior
performance over long period of time?
•How to firms sustain their competitive advantage?
3.Why and how should a firm operate in more than one
business/market?
•When and how do more than one business together create greater
value than if these businesses were stand alone?
•Why, when and how multiple business firms create synergy?
•Why, when and how multiple business firm out-performs its rivals
Strategic management seeks to answer some
interesting and important questions for managers

23. All of these questions
take us back to relative
wedge between
WTP and TCP
WTP
Total Cost
WTP
Total Cost

24. Strategic Management Process: A systematic way
to build a theory of competitive advantage
Objectives
SLEPT
Five Forces
Value Based
External
Analysis
Internal
Analysis
VRIO
Value Chain
ARC
Strategic
Choice
Scenarios
Decision Tree
Business
and
Corporate
Strategy
Strategy
Implementation
Policies
Coordination
Incentives
Controls
Competitive
Advantage
SWOT
Analysis Formulation Implementation

25. Strategic Management Process: A systematic way
to build a theory of competitive advantage
Objectives
SLEPT
Five Forces
Value Based
External
Analysis
Internal
Analysis
VRIO
Value Chain
ARC
Strategic
Choice
Scenarios
Decision Tree
Business
and
Corporate
Strategy
Strategy
Implementation
Policies
Coordination
Incentives
Controls
Competitive
Advantage
SWOT
Analysis Formulation Implementation

26. Implication for Strategists
Its about mastering
AFI framework

27. What is a Theory?
How do we know it is Good Theory?
When Should we know if it is Good or
a Bad Theory?

28. Let us play a game …
Strategy: A theoryof how to gain and sustain
competitive advantageand not a rule …
•Simultaneous flip of coins (imagine two coins together)
•Guess the total # of heads
–Four potential outcomes: HH, TT, HT, TH
•You can use theory from the probability to predict most
likely number
•There is no guarantee
•You are more likely to succeed when using theory
•One can fail even when using theory as best as it can be used
•One can be successful in the absence of a theory–that is luck

29. A theoryof how to gain and sustain
competitive advantageand not a rule …
•How do we judge if a theory is a good theory or a
bad theory?
•After the fact: Based on outcome?
•When do we need to choose a theory?
•Before the fact! How do we know if among the alternative
theories which one is good which one is bad?
•How do we know if a theory is good or bad before
the fact?
–Consistent assumptions
–Underlying principles and logical structure

30. What is a Goodtheory
of
sustained competitive advantage?
And how do we test it before the fact?

31. •Unique proposition: different from your
competitors (cost-WTP combination)
•Tailored Value Chain: Choosing to perform
activities differently or to perform different
activities than rivals
•Tradeoffs: Doing one thing one way makes it
difficult to do the other without a compromise
•Choosing what not to do. e.g. Saying No to certain
customers
•Fit: System of activities where activities fit
together and reinforce competitive advantage
being pursued.
•Discrete activities affect one and another
•Continuity: of building and strengthening
sources of advantage over time
Porter: Strategy is about creating unique and
Valuable position that involves tradeoffs
Michael E. Porter
Professor, Harvard
Business School

32. Strategy –what it is not!
Michael E. Porter
Professor, Harvard
Business School
“Operational excellence is nota Strategy!”
“Strategy is NOTaspiration, action, deals,
importance, vision, mission, learning, values,
change, agility, growth, price, best practices,
operations, acquisitions, or structure”.
Michael E Porter World Business form Notes, 2006
Operational excellence often involves
imitable benchmark and best practices
such as TQM, Lean Manufacturing, Six
Sigma Quality etc. ..
At best it can make a firm as good as competitors!

33. Remeltdefines Good strategy
and Bad strategy
Hall Mark of Bad strategy
1.Failure to face the challenge
2.Mistaking goals for strategy
3.Bad strategic objectives
4.Fluff: Fads
Richard P
Rumelt
Harry and Elsa Kunin
Chair in Business and
Society
UCLA Anderson School
of Management

34. Good strategy
1.Diagnosis: Rigorous analysis offers
diagnosis of key challenges in
creating and sustaining competitive
advantage
2.Guiding Policies: Spells out
economic logic underlying strategic
choices
3.Coherent actions: Set of
consistent and reinforcing actions
Richard P
Rumelt
Harry and Elsa Kunin
Chair in Business and
Society
UCLA Anderson School
of Management
Remeltdefines Good strategy
and Bad strategy

35. •Uncertainty
oMonitor assumptions
•Intended vs Emergent strategy
•Realized Strategy
Theories need to adapt to evolving
Uncertainties –routinely updated30
40
50
60
70
80
90
100
Profitability
Choice 2
Choice 1

36. Takeaways
and
Implications for Strategists

37. •Strategy is linked to a firm’s performance.
•It is a theory of how to gain and sustain competitive
advantage
•A theory/hypothesis rests on the assumptions and
the logical structure that connects these assumptions
to the premise
•Quality of underlying assumptions and logical
structure determines the quality of the theory
•Good strategy can be assessed before the fact.
What is Strategy: Takeaways

38. •Competitive advantage is about creating greater
economic value than an average player in the
industry
•There are three generic strategies—differentiation,
cost leadership, and Integration
•Strategy involves examining drivers of relative WTP
and relative Total Cost.
•Strategic management process offers systematic way
to Analyze, Formulate and Implement strategy
•Strategy is dynamic
What is Strategy: Takeaways

39. Implication for Strategists
Its about mastering
AFI framework