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


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?


Porter’s Five Competitive Forces that Drive Industry Profitability

Potentialnew entrants

Industrycompetitors

Threats of substituteproducts or services

Bargaining powerof suppliers

Bargaining powerof buyers

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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


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


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


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


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


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!


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


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


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


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?


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)


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


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?


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


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


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.


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


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


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

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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


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


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


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.


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)


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


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


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


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


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


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”


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

Overview and Course Summary MGTO650Y: Strategic Management Dr. Theodore H. K. Clark, MBA, DBA...

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