Overview and Course Summary MGTO650Y: Strategic Management Dr. Theodore H. K. Clark, MBA, DBA...
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Transcript of Overview and Course Summary MGTO650Y: Strategic Management Dr. Theodore H. K. Clark, MBA, DBA...
Overview and Course Summary MGTO650Y: Strategic
Management
Dr. Theodore H. K. Clark, MBA, DBAAssociate Professor, Department of Information & Systems Management
The Hong Kong University of Science & Technologyand Adjunct Associate Professor of Operations & Information Management
(Information Economics and Strategy Group) 1998 - 2001
The Wharton School of the University of Pennsylvania
2HKUST Business School
What is Strategy? Strategy versus Tactics
Strategy is when you have time to plan Time is a luxury many firms may not have Planning helps firms avoid failures or inefficiency
Doing the right things, not just solving the urgent crisis
Goal of Strategy is to Gain Advantage Faster growth, higher margins, or both
Alternative is More Work, Resources, or Luck But, a good strategy can beat superior forces
3HKUST Business School
What is Competitive Advantage? Comparable Advantage - Something you are
better at than almost everyone else Circular slide rule example Swedish language example
Competitive Advantage - A comparable advantage that MATTERS in your market Circular slide rule skills irrelevant; use calculator! Swedish MIGHT matter in some environments Would Cantonese be a competitive advantage?
4HKUST Business School
Porter’s Five Competitive Forces that Drive Industry Profitability
Potentialnew entrants
Industrycompetitors
Threats of substituteproducts or services
Bargaining powerof suppliers
Bargaining powerof buyers
HKUST Business School
Three generic strategies
Overall CostLeadership
Differentiation
Focus
StrategicTarget
Industry
SegmentOnly
Strategic Advantage
Uniqueness Low cost position
“Determining the cost/value tradeoff you wish to offer consumers is themost critical decision” - Porter
6HKUST Business School
Porter’s Generic Strategy # 1: Leadership Based on Lower Cost Become low-cost producer in the industry
Lowest total cost, not just low variable cost Often driven by economies of scale Must have parity quality or have lowest cost
AFTER adjusting for quality differences Leveraging scale is common source of
advantage in many industries
7HKUST Business School
Porter’s Generic Strategy # 2: Differentiation and Segmentation Differentiation means to make your product
unique and (hopefully) more valuable Becoming hard to copy is critically important Avoid commodity competition based on price
Differentiation must be worth more to customers than it costs to create
Horizontal differentiation (segmentation) versus vertical differentiation (quality) Less competition with horizontal differentiation
8HKUST Business School
Porter’s Generic Strategy # 3: Focus or Niche Target Market Can be based on cost, differentiation or both
By targeting a narrow market segment, you may be able to provide targeted products and services to that segment that are both low-cost and differentiated relative to less targeted firms
Strategy is by design differentiated based on segment, as target market segment needs must be unique for focus strategy to work
May be only option open for new entrants
9HKUST Business School
Rethinking and Updating Porter’s Generic Strategies Today Cost leadership and differentiation are
often hard to separate or clearly distinguish Cost leadership adjusted for quality differences Differentiation relative to differentiation costs Market leaders generally achieve BOTH
Information goods total cost leadership means highest volumes (or copying) Differentiation critical to achieving scale Pricing not uniform, so a new key variable
10HKUST Business School
Attackers’ Advantage Large Business Operations Focus on
Meeting the Needs of Traditional Customers New Products and Services Offer Small
Revenues Cost of Redesigning Existing Processes is High
New Entrants can Focus on Niche Markets Fast Growing Niche / New Customer Segments New Products with Higher Initial Cost and Value Rapid Growth Replaces Traditional Markets
Ignoring New Markets can be VERY Costly!
11HKUST Business School
Sustainable Advantage: Part 1 Economies of Scale and Network Externalities
Economies of scale important for E-commerce (e.g., advertising, software development, etc.)
However, network externalities can be even more powerful forces in online business (Metcalf’s Law)
Value of network of relationships increases as a function of the number of people or systems in the network
Fax machines, Telephones, VCRs, VCD, E-mail, Internet Learning effects of scale can also be hard to copy
12HKUST Business School
Sustainable Advantage: Part 2 Access to Resources as Source of Advantage
Access to either suppliers or channels of distribution can be a sustainable advantage
Customer switching costs can provide a first mover advantage and can favor established firms
Part of IBM’s continuing advantage is due to cost of software conversion which makes switching difficult
Brand can be viewed as a form of switching cost, but may be overcome with intensive promotion
Scarce expertise may provide lasting advantage
13HKUST Business School
Sustainable Advantage: Part 3 Government, Politics, and Options Advantages
Patents, copyright, and trademarks are Government granted Monopoly rights (potentially hard to copy)
Franchises and Licenses, granted by Governments or by Large and Successful Firm, can be hard to copy
Value of owning McDonald’s franchise right can be high Right to operate Star Ferry may valuable and hard to copy
Government policies on antitrust or prohibitions of monopoly can be source of advantage or disadvantage
Government “grants” may be source of advantage
14HKUST Business School
Targeting the New Battleground Pricing and Versioning can create NEW
strategic options that can enable firms to overcome SIZE advantages of dominant firms
Alternative to “Winner Takes All” is smartest firm using customer information most effectively gains competitive advantage.
How can firm with higher operating costs (due to lower scale) WIN with lower prices?
15HKUST Business School
Information-Based Pricing Strategy: Profit-Based Market Segmentation Information about customers enables
customized pricing of many services Pricing based on RISK (Insurance) Pricing based on VALUE (customized goods) Pricing based on SAVINGS (industrial goods)
Differential pricing premiums (grocery, clothing, perfume, and many other goods)
Pricing based on PROFITABILITY (targeting)
16HKUST Business School
Power of Profitability Gradient New Entrants Exploit Profitability Gradient
Profitability of all customers is not the same Historical pricing is not adequately
differentiated Information advantage can yield high profits
Percentageof TotalCustomers
Percentage of Total Profits-20 0 20 40 60 80 100
10
0
80
60
40
20
0
17HKUST Business School
Datamining: A Powerful Segmentation Tool, But … Datamining can only tell you about possible
correlation, not drivers of behavior Driven by past data; future might be different Correlation not same as causality (coincidence)
Need to look for plausible justification for findings from datamining processes For example, datamining shows that CEOs are
bad customers for credit card companies - WHY?
18HKUST Business School
Information-Based Pricing Strategy Information about customers behavior,
preferences, cost-to-serve, and ability to pay can be extremely valuable for ALL products
Datamining is ONE powerful tool that can be used to understand potential opportunities Correlation but not causality
Data collection in online businesses can be much lower cost than for traditional firms
Valuable and unused data as free byproducts
19HKUST Business School
Information Alliances, Outsourcing, and Strategy Information outsourcing is becoming
increasingly common and popular Information alliances are becoming essential
for competitive advantage, especially for network goods to achieve scale for success
Vertical integration initially projected for the new economy is becoming virtual integration No firm can afford to own all elements of the
value chain in today’s complex, global economy Virtual integration is both efficient and flexible
20HKUST Business School
Information Based Organizational Transformation Implementation Implementing Transformation Strategy
Objective are often unclear or evolving over time Industry transformation is hard to do top down Risks and failures can be costly for innovators
Radical Goals, Incremental Change Process Harvard study of successful Reengineering P&G channel transformation success case study
Process R&D and Process Prototyping Needed Infrastructure more than systems; need skills too.
21HKUST Business School
Risks and Benefits of Sharing Information Sharing information even once can result in
power shifts that last for years in a relationship (proceed with caution)
However, successful partnerships based on shared information can yield strong mutual benefits and reduce channel inefficiencies P&G now selling more than 50% of volume
using channel information sharing processes Intel and customers both benefit from shared
information to improve efficiency and service
22HKUST Business School
Developing Relationships of Trust Establishing inter-organizational
relationships based on trust requires management time and attention
But, management time is one of the most scare assets any firm possesses, especially for senior management
Thus, any firm has a limit on the number of close relationships based on trust which can be sustained
23HKUST Business School
Evolution of Trust and Consolidation of Relationships Limited number of relationships at a high
level of trust results consolidation of vendor and customer relationships
Tight partnerships for critical jointly interdependent activities (e.g., JIT) GM and other firms reducing suppliers Strategic supply networks and alliances
Leaders in developing trust can gain sustainable competitive advantage
HKUST Business School
Value Chain - Activities
InboundLogistics
Operations OutboundLogistics
Marketing &Sales
Service
Organization
Human resources
Technology
Purchasing
SupportActivities
PrimaryActivities
Idea: Break firm down into manageable pieces for analysis
From: Porter & Miller, 1985
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Organizational Planning Given Future Uncertainty and Change “ One thing you can be sure of is that there’s
nothing to be sure of” What about Death and taxes? Well, maybe not even these, at least in timing
Business implications of new innovations Consumer behavior and future customer needs almost
impossible to predict Pace of innovation MAY be predictable, but not the fit
between innovations and market needs Copying cheaper than innovating (fast follower wins!) Getting timing right and moving fast is critical
26HKUST Business School
Investments in Business Planning as Future Decision Automation Traditional business planning process
requires firms to make many decisions in advance Detailed plans and high level approvals Plan the work, then work the plan Limits future decisions, which can save time later
However, traditional planning approaches are often criticized as being too inflexible Automation of management decisions - low cost
and better planned, but not responsive to change
27HKUST Business School
Benefits and Costs of Investing in Flexibility for Manufacturing Flexible manufacturing versus Automation
Fast Responsiveness at Low Cost (Goal) Flexible manufacturing delivers both, but at COST Automation is low cost at less investment Manual process is flexible, but high cost
Why not pick either Manual or Automation, depending on what your business needs?
Investments in Flexible Manufacturing can be viewed as creating an option on the future.
28HKUST Business School
Investment in Flexible Business Planning: Scenario Planning Similar to flexible manufacturing, scenario
planning creates option value for the future Traditional planning => factory automation Entrepreneurial management => manual labor Scenario planning => flexible manufacturing
This is an INVESTMENT which has a COST Senior management time required for planning Management time as a scarce resource Low probability of high payoff (option investment)
29HKUST Business School
Scenario Planning as Strategic Advantage: Shell Oil Example In mid-1970s, we had lots of data on oil
prices, with price always declining over time However, there were indications of change on
the horizon which could change this trend Most firms thought about this as a risk which
was not quantifiable, but did little to plan for possible changes in their environment
Shell Oil created a Scenario Planning model to enable fast response to external change
30HKUST Business School
The Scenario Planning Process Brainstorm to determine most critical dimensions of
future uncertainty Unknown and unknowable uncertainties (consulting study
will not help us to resolve this uncertainty) Important (affect our decisions or ability to succeed) Limit of two is important due to practical planning limits
(but can be relaxed if using for computer simulation models)
Develop scenarios using these dimensions, and develop consistent future model for each scenario
Brainstorm about implications for strategy and investment Develop ROUGH strategy plans for each scenario Look for low cost, high payoff investment opportunities
31HKUST Business School
Scenario Planning and Simulation can “Create” Value as “Real Options”
Scenario planning for organizations, and the computer extended simulation versions of this for portfolio investments, can create new value
Like options, the investments only pay off occasionally, but can have high payoffs when rapid change occurs
Can be used to enable large firms to react faster, like smaller entrepreneurial firms, to environmental change
Modest investments appropriate, but should not replace traditional processes or tools
Unlike to be marketed by consultants, so may be a source of competitive advantage for firms that become good at using these capabilities
32HKUST Business School
Strategic Planning and Change Strategic planning is generally only needed if
there is change or uncertainty in the future Existing plans are probably adequate if no change Change is more likely in the future than stability
Key Challenge is Planning with Uncertainty Predictable change is easier than uncertainty Changes can be both important and uncertain
Scenario Planning Developed for Uncertainty Addressing future importance and uncertainty
33HKUST Business School
First Step in Change Management is Identifying What to Change Vision or direction is the starting point for
implementing change management Unfortunately, it may NOT be clear HOW
the future will change, so goals are uncertain
Leading change with uncertain goals is difficult and hard to build internal support
Scenarios can be useful ways of identifying areas where new skills may be needed
34HKUST Business School
First Step in Scenario Planning is Identifying Key Uncertainties Look for change areas that are both:
Unknown and unknowable uncertainties (consulting study will not help us to resolve this uncertainty)
Important (affect our decisions or ability to succeed) Evaluate the level of importance and uncertainty
for each area of uncertainty or change identified Brainstorm to identify as many areas of uncertainties or
change as possible at first Prioritize your list into top 4 themes using above criteria Consider different challenges for different “businesses”
35HKUST Business School
Breakout Session: Small Groups Discuss & Identify Uncertainties Groups Designed to Encourage Discussion
Not people you work with every day on the job Not all same level within groups No HIERARCHY in GROUP, but DEMOCRACY Not necessarily in group related to current job
Brainstorming ideas used to drive later decision making and models for each group
Build consensus on group discussion focus