Strategy Fundamentals

• What is Strategy?

• Competitive Advantage

• Strategy and Organization

• Dynamic Advantage

What is Strategy?Context Internal

(resources & organization) + External

(industry, economy)

Actions Acquire resources, Redesign processes, Organization change

Performance Market share, profits, brands, innovation, reputation, employee satisfaction,

social goals

• Tangible resources: facilities, labs, infrastructure and money

• Intangible resources: product designs, brands, relationships

• Human resources: employee skills, managerial competence

What is Strategy?

Internal Context: Resources and Organization

External Context: Industry characteristics plus social, political and regulatory environment

Performance: Profitability is most common

– Total profit vs. Profit rate

– Short term vs. Long term

– Shareholders value

Strategy:

– Understanding of the key relationships among actions, context and performance

– A guide for managers to take actions consistent with this understanding

Elements of

Strategy

I. Goals: where?

II. Scope: what?

III. Competitive Advantage: how?

IV. Logic: why?

Elements of Strategy

• Goals: Dominate market, Technology leader, …

Why important to have goals?

• Scope: Products, Markets, Activities?

What’s NOT included?

• Competitive Advantage: Cost, Differentiation, …

How are you better?

• Logic: Lo cost Lo Price Dominance Scale economy Lo cost

Dot-com’s nemesis

Border’s Strategy StatementLong-term goals: Borders will be the leading retail distribution outlet for books in the United States measured by the number of books sold and revenue market share. We will have the greatest revenue per square foot of any book retailer and the highest margin per book. Our customers will have the most satisfying book purchasing experience in terms of variety of books offered, in-store availability of desired titles, and helpfulness of staff. We will expand from our base in the United States to Australia, New Zealand, Singapore and the United Kingdom. 

Scope: Borders will run a chain of large (in excess of 20,000 sq. ft.) bookstores carrying a wide variety of titles (in excess of 80,000) in each store. We will be located in all major metropolitan areas in the United States and Canada. Our facilities will be leased rather than purchased, and, while designed to fit into the local architecture, they will share a common layout and common information systems. Most stores will have a coffee bar, the operation of which will be outsourced. We have developed and continue to maintain and improve a proprietary information technology system for tracking and managing inventory. We are not vertically integrated into the production of books. 

Competitive Advantage: We believe that the following are key sources of competitive advantage: 

• Our large scale

• Our proprietary inventory system

• Our highly trained in-store staff

• Customer awareness of our name and reputation for service and value

• Our prime locations of existing stores

• Perception of our stores among real estate developers as valuable "anchor tenants."  

Logic: Our wide variety of titles, low prices, highly trained staff, and attractive stores provide an attractive shopping experience for our customers, making us their first choice in bookstores. The high volumes this generates in each store coupled with the size of the chain give us significant purchasing power that enables us to procure books at favorable prices. Furthermore, our proprietary inventory management gives us superior knowledge of what to stock and minimizes "out of stock" occurrences, optimizes inventory on hand, and minimizes returns of books to suppliers. Our unit costs are therefore the lowest in the industry, allowing us to have the highest margins despite having below average prices. While we have significant expenses in terms of creating and maintaining our proprietary information systems, training, brand advertising, and administration, our ability to spread those expenses over many stores enables us to keep our operating expenses a low fraction of revenue. Our current store locations give us a first-mover location advantage, and our reputation for attracting traffic makes us an attractive anchor tenant in new locations, facilitating growth through new stores, allowing us to leverage our competitive advantages into new locations.

What is Strategy?

• Is Strategy = Mission?

Mission = purpose, philosophy, reason for existence.

• Is Strategy = Values?

Values = commonly held norms, often for PR.

• Is Strategy = Vision?

Vision = a mental image of future directions.

• Is Strategy = Charter?

Charter = similar to scope.

Sunrise Medical ExampleSunrise Charter. Sunrise Medical designs, manufactures and markets products used in institutional and homecare settings that

address the recovery, rehabilitation and respiratory needs of the patient.  

Sunrise Mission: To improve people's lives by creating innovative, high quality products.  

Sunrise Values: 

1. Product Superiority: We are a product‑driven company: We are only as good as the products we make. We are committed as a corporation to offering products with genuine superiority in quality, innovation and value, but the most important of these is quality. Our quality standard is: do it right the first time.

2. Service to Customers: In our company, the customer comes first. Our customer ser vice goal is to Exceed Customer Expectations Every Day. We must outperform our competitors in demonstrating sensitivity and responsiveness to our customers' needs.

3. Respect far Associates: We value the diversity of our Associates and believe in the dignity and worth of every individual. We will treat our Associates with fairness and respect, while empowering them to think independently and act resource fully. Every job is important and must be performed well if we are to succeed. Our company provides equal opportunity worldwide for all Associates to achieve personal growth and fulfillment in their careers.

4. Teamwork: All of us together are stronger and wiser than any of us is individually. We will foster within our company the attitude of a championship team: a spirit of enthusiasm, dedication and fun while working together in the pursuit of common goals. We will be known as people who care about our customers, our products, our company and one another.

S. Performance: We must earn an attractive return for our stockholders, which in turn ensures our corporate future and permits us to reinvest in growth. The key to corporate performance is achieving continuous improvement in every area of our business. To do this we must develop our core competencies, operate with the latest methods and technologies, and invest in education to improve our critical skills.

6. Social Responsibility: Through our commitment to corporate excellence, we will improve the welfare of those who use our products and advance the progress of society. We will respect and help protect the environment. We will also be good citizens of every community and every country in which we operate, thereby contributing to global prosperity and harmony.

7. Integrity: We are committed as an organization to acting with integrity and character. When faced with moral choices, we will do the right thing. We will bring professionalism and proper business conduct to everything we do. Above all, we are dedicated to being a company with integrity.

Do we need an explicit strategy statement?

Yes!

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No!

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Strategy Fundamentals

• What is Strategy?

• Competitive Advantage

• Strategy and Organization

• Dynamic Advantage

Competitive Advantage– Create and capture value to achieve advantage

– Is there a universal key to competitive advantage?

– Positional advantage (e.g., dominant industry position)

– Capability based advantage (e.g., superior quality)

– Capabilities and position may interact

Positional Advantage

– Brand name (Coke, Mercedes)

– Customer relationships (Nordstrom)

– Government protection (Developing economies)

– Distribution channel (P&G can get shelf space)

– Geographic incumbency (Wal-Mart in small towns)

– Installed base (Windows)

– Infomediaries (AOL, Yahoo!)

Capability Based Advantage

§ Firms differ in capabilities. (Thru organizational learning)

– Manufacturing capability (Miniaturize consumer electronics)

– Time to market (Japanese auto-makers)

– Organizational capability (Resources, processes, values)

§ Distinct capabilities (Are you better than rivals?)

Sustainable Advantage?

Sustainable advantage resists competition

Capability:

1. Improve continuously (through learning)

2. Better if it’s hard to understand and imitate (complexity of structures, routines, culture make it hard to codify and capture)

Position:

1. Defend your position (Windows in O/S market)

2. Position may change hands (IBM compatible to Wintel)

Is my advantage from position or capability?

• Does it matter?

• Capabilities may lead to a position that deepens capabilities

• May affect defense

– How did AT&T defend its monopolistic position until 1984?

– How would Sony defend its manufacturing capability?

• What is Boeing’s advantage for?

– Position in a duopoly market? Or,

– Capability to manage large-scale projects?

Resource-Based View• A firm possesses a bundle of resources: tangible

(facilities, labs, infrastructure and money), intangible

(patents, copyrights, brands, relationship), and human

(employee skills, managerial competence)

• Resources may be combined to produce capabilities or

position-based advantage thus imbibing it with certain

competencies

• Core competencies are few competencies that

endanger a firm competitive advantage

• Core competencies are subject to both internal and

external contexts of the firm

Strategy Fundamentals

• What is Strategy?

• Competitive Advantage

• Strategy and Organization

• Dynamic Advantage

Strategy & Organization: Southwest Airline

Strategy and Performance

– Selected point-to-point short-haul markets with business traffic

– Deliver customer value thru reliable, low price customer service

– Low cost structure thru high aircraft utilization, no-frill service

– Highly profitable

Organization

– Same TEAM for same ROUTES meet same CUSTOMERS

– Recruiting and corporate policies promote fun

– Flat organization with trust in senior management

Industry Comparison

– Competitors copy team idea, but reduce discretion

– Hub and spoke system requires complex problem solving at central level

– SW teams responsible and paid for flight performance

Strategy & Organization: Southwest Airline

Organization Design

Problems

Incentive Problem

Coordination Problem

1. Incentive Problem: Induce people with divergent private goals

Information asymmetry, moral hazard, and monitoring costs

2. Coordination Problem: What are the work flows? Who makes what decisions? How is information shared?

Do we promote specialization or team-based environment?

Architecture

Organization Design

Routines Culture

Organization is a necessary condition of advantage (Organization design is dictated by the strategy; no BEST design)

Organizational elements must be consistent with one another, and align with strategy.

Elements of Architecture1. Organizational structure deals primarily with coordination

– Divide people into sub-units and define linkages between them

– Functional versus Divisional structure

– Flat versus Tall hierarchy

– Horizontal linkages (personal network, liaisons, task-forces)

2. Compensation and rewards deal with incentive problems

– Indicators related to profitability

– Benchmarking to “net out” external effects

– Multiple indicators may help. Why?

– Cost of monitoring limits number of indicators

Functional Versus Divisional Structure

CEO

Sr. Mgr. Sr. Mgr.

Legal Finance Marketing R&D Mfg.HR

CEO

Div 1 Div 2

Mfg.Mfg. HRHRFin. Fin.

• Single industry firm: Specialization; Career development.

• Multiple product lines or countries: Coordination within division.

Other Structures

Matrix: Dual or triple authority structure. An employee may report

to a country head and a business sector head. In Shell, a

manager would report to Managing Director of Shell France and

Head of Shell Refining sector.

– Typically one command structure dominates.

– Leads to much complexity!

Project: Fixed functional departments plus temporary project

teams in construction, oil exploration, …

Routines & Culture

Routines: Establish common expectations and a protocol for cooperation between parties in the performance of a process (coordination gains)

– What decision making rules (e.g., majority, consensus, seniority) exist?

– What routines exist for resource allocation, information sharing, coordination within and between subunits?

Culture: Commonly held values and beliefs

– How strong? Does it support cooperation?

– Does it improve goal congruence and thus reduce need for financial incentives?

STRATEGY:Competitive Advantage

Coordination Issues

Incentive Issues

Culture Routines

Architecture

Strategic AlignmentOrganization must support strategy!

Coordination

– HQ need information about customer needs and operational problems

– HQ and flight teams need cost info

– Passengers use boarding routines

– Curb-side check in info to flight team

Incentive

– Flight team focus on costs and customer needs

– Conflicts between costs and customer needs need balance

Culture Routines

– Customer focus – Managerial probing

– Teamwork / fun – Direct customer contact

Structure Compensation

– Teams – Team performance measures

– Flat hierarchy – Team performance pay

Southwest Airline

Strategy Fundamentals

• What is Strategy?

• Competitive Advantage

• Strategy and Organization

• Dynamic Advantage

Competitive Advantage is Dynamic!

Exploiters: Deepen present competitive advantage (e.g., reduce costs, improve product performance),

And,

Explorers: Develop new form of competitive advantage (e.g., develop new products and markets)!

– Pure explorers develop new competitive advantage

– Pure exploiters reinforce current advantage

– Many combine these two approaches!

STRATEGY:

Competitive Advantage

Coordination Issues

Incentive Issues

Culture Routines

Architecture

Strategic Alignment

Refine / Deepen: Exploiter

Discover new ways: Explorer

Explorers versus Exploiters

Exploiters Explorers

Less organizational slack Some slack for innovation

Tightly coupled (Risk?) Loosely coupled

Centralized Decentralized

Learning in its domain Learning outside domain

Fit for stable conditions Fit for changing conditions

Borders Revisited: Entered the WebNew Online Entrant: Amazon.com

Internet craze kicks in the media!

Borders management faces a battery of questions -

– Is convenience of the online channel too great?

– Is the knowledge and help of Borders’ staff not enough?

– What capabilities would be required for the new channel?

– Would it be able to integrate bricks and clicks?

– How would the sharp strategic change be implemented?

– What new incentives and coordination would be required?

– Would it make profit on Web sales when Amazon couldn’t?

– Should Borders do nothing?

Borders Exits the Web, 2001

Web Sales in 2000: Amazon $1.7 B, Barnes and Noble $320 M

Borders sold $27 M and lost money

– Borders could not develop market-leading online capabilities

– Borders could not integrate the two channels

– Borders organization was not conducive to online business

– Borders failed as an explorer

Border concludes an alliance with Amazon

– Amazon to provide inventory, fulfillment, Web content, & service

– Borders to receive commission from Amazon for referrals

– New site to include Borders store locations & calendar of events