Lecture 1 - Intro to Strategy by keara


									Agenda: January 10, 2003
 Class Overview / Intro to Strategy
 What is Strategy? (Porter article)
 Current Events
Business Strategy and Policy
   Phone Number
   E-mail Address
   Major & Class Standing
   Career or Personal Interest(s)
   Work Experience (industry, length of time)
Business Strategy and
     BA 495 Section 06
      Friday 1:00-4:50
        Room BA 130
What is strategy?
 It’s the coherent development of a business model,
 where you first select an industry, and then decide
 how to compete within the industry.
 It coordinates all the functional areas into one main
 In this context, the objective of strategy is to
 create and sustain competitive advantage for
 the firm.
   You should have a good “fit” between your internal
    capabilities and the external requirements from the

   Your strategy should take advantage of your strengths.
What is this course all about?

 Strategic Competitiveness
 Achieved when a firm successfully formulates
 and implements a value-creating strategy
Sustained Competitive Advantage
 Occurs when a firm develops a strategy that competitors
 are not simultaneously implementing
 Provides benefits which current and potential competitors
 are unable to duplicate
Above-Average Returns
 Returns in excess of what an investor expects to earn
 from other investments with similar risk
Strategy Relates A Business To
Itself and Its Environment
Competitive Environment

                  Mktg.      Strategy          Ops
 Regulation                                            Int’l Economies

                          Sales             H.R.
Model of Strategic Management
External Analysis
   (Chapter 3)          Strategy
Internal Analysis
   (Chapter 4)       Business Level
                      (Chapter 5)
                    Corporate Level
                      (Chapter 6)         Strategy
                    Functional Level
                      (Chapter 7)       Organizing
                                        (Chapter 8)
                                                         Evaluation &
                                          Staffing         Control
                                        (Chapter 9)     Metrics (Chapter
Challenge of Strategic Management
Only 16 of the 100 largest U.S. companies at the
 start of the 20th century are still identifiable today!

In a recent year, 44,367 businesses filed for
   bankruptcy and many more U.S. businesses failed

Competitive success is transient...unless care is taken
  to preserve competitive position
An Example: Gap Inc.
Founded in 1969, Gap Inc. is a global specialty retailer selling apparel,
personal care and other accessories for men, women, and children
For the 26 weeks ended 7/29/00, net sales rose 20% to $5.8 billion. Net
income rose 6% to $419.4 million and three different “brands,” including:
   Banana Republic
   Old Navy
Employs over 110,000 people worldwide and operates 2,900 stores in the
United States, Canada, France, Germany, Japan and the United Kingdom
What’s the strategy behind this business? How do you explain its success?
How do you explain its recent stumble?
Challenges Facing Gap Inc.
 Overall Environment?
    How is the apparel retailing business evolving, both in
    terms of its customers, competitors, etc.?
 Specific Challenges?
    What sorts of challenges do these changes present to
    Gap’s current strategy?
 What to do?
    What options does Gap Inc. have for dealing with these
 How to implement?
    What strategy should Gap Inc. employ to maintain its
    competitive advantage, and how does the organization
    need to change to implement this strategy?
What is Strategy?
    (Michael Porter)
  What makes good strategy?
  (Porter’s Point)

       Operation Effectiveness = Good strategy ?
          NO !!
          Outperform your rivals in similar activities.
          JIT, TQM, Outsourcing (imitable??)

Time                                            Long-term

Porter’s Article: Operational
Effectiveness vs. Strategy
 Operational Effectiveness
   Performing similar activities better than rivals
   perform them (charge higher price or reduce
   Possibility of diffusion

 Strategic Positioning
   Performing different activities from rivals or
   performing similar activities in different ways
   Unique activities
Total Quality Management
 Emphasis on organizational commitment to
   Continuous improvement of every process
   Data-driven, problem-solving approach
   Empower employees and teams
Productivity Frontier
                                                                Productivity Frontier
 Nonprice buyer value delivered


                                         high                                      low
                                                Relative Cost Position
Appraising Strategy and Achieving
Competitive Advantage
 So, a strategy is a plan or pattern of choices
 which results in a competitive advantage
 How to judge the level of competitive
   Interest Rate (NPV>0)
   Industry average level
   Closest competitor
  Gains in one area can be achieved only at
  the expense of another area.
  Trade-offs come about due to
  inconsistencies in image or reputation

What type of trade-offs can we come up with?
 How do you determine which decision is
 best for the organization?
Strategic Positioning
 Variety-based positioning
   Based on product or services offering rather
   than customer segmentation (Jiffy-lube)
 Needs-based positioning
   Target customer strategy (Bessemer Trust vs.
 Access-based positioning
   Based on set activities needed to reach market
Appraising Strategy and Achieving
Competitive Advantage
 So, a strategy is about combining activities
 that fit each other

 What kinds of strategies are likely to
 achieve competitive advantage?
   One aspect of a good strategy is that it is
The First Rule of Strategy
 A Good Strategy Is “Coherent.”
   Functional pieces of strategy support the whole
   Southwest Airlines, American, & Continental

               Mktg.                   Oper
                          Strategy     .

                 Acctg.              H.R.
   The idea that that the firm coordinates its activities
    such that they complement and reinforce each other.

       1st Order Fit – Simple consistency between
        functional activities
       2nd Order Fit – Activities are reinforcing
       3rd Order Fit – Optimization of effort

    Poor performance in one area will bring down
    performance in others.
Coherence and Sustainable
Competitive Advantage
    Strategic positions built on a coherent systems of
     activities are far more sustainable than those built
     on individual activities.

                        Competitive Advantage
Fit or
Coherence        +
Discussion Questions
 How does only flying 737s lower
  Southwest’s costs?
 Why Can’t Continental Imitate
 What does Southwest miss? In other
  words, how is Southwest limited by its
  own strategy?
How does only flying 737s lower
Southwest’s costs?

   Lower maintenance costs: mechanics can better
    specialize, less inventory on hand
   Lower training costs—pilots only have to learn
    one set of controls,
   Quicker turnaround times—Southwest gets one
    additional ―flight‖ per day from each aircraft,
    lowering capital costs.
   Less scheduling problems
   Volume purchasing from Boeing
The 737s guide other strategies too!
   Southwest only flies direct, short flights.
    – No lunches (less cleanup costs too!)
    – Expansion is tied to existing locations
    – More opportunity for “return flights”

   Southwest avoids hubs if possible.
Why Can’t Continental Imitate Southwest?

    Inconsistent image or reputation
          Frequent flyer program

    Trade-offs among different activities
          Hubs too busy for quick turn around
          Lose focus

    Internal Coordination and Control
          Commission for travel agents
Strategic Coherence -
The Logic of How The Business Fits Together

    Southwest Airlines            Continental Airlines
       Low Price                     Premium Priced
       Short Routes                  Short, Long, & Int’l
       No Frills                     Variety
    Point-to-Point                Hub & Spoke
    One Aircraft - Boeing 737     Multiple Aircraft
    High Aircraft per Route       Low Aircraft per Route
    No Meals                      Meals & Service
    Flexible/ Lower Staffing      Higher Staffing (Unions)
    Price-sensitive customers     Comfort-sensitive
Why does Southwest Succeed?
This is Porter’s point

   Southwest succeeds because it does not try to
    become United Airlines.
        o It will never be a ―luxury leader‖; Southwest
          leaves that to others.

   Southwest succeeds because its strategy is
    coherent and thus hard to imitate.
What does Southwest miss?
   Doesn’t shop around for aircraft—Boeing has a
    captive customer
   No international expansion (except maybe Canada
    and Mexico)
   Not as much first class business—mostly tourists
    and cheap companies.
   Can’t hop into ―hot markets‖ unless they’re close
    by. Expansion comes slowly.
Growth Trap
 What does Porter term the growth trap or
 “growth imperative”?

 How does a company go about reconnecting
 with its core strategy? (hint: see pg. 76)

 What are the “hot features” that Porter
Role of Leadership
 How can the leaders of an organization
 instill discipline?

 How can they communicate strategy?

 How can they communicate and drive
 changes in core strategies?
In Summary,
 Improving operational effectiveness does
 not necessarily mean it represents the
 The strategic agenda involves trade-offs.
 Strategies need constant attention; its
 enemies are distraction and compromise.
 Coherence is critical to sustained
 competitive advantage.
 A strategy must be adequately
 communicated and reinforced.
Current Events
 Approximately 10 minutes
 Determine relevant news item/company
 Examine current strategic elements
 Evaluate performance and direction
 Facilitate class discussion
Cases & Industries

Wal-mart Stores, Inc.   Retail Industry
RCA Records             Entertainment Ind.
American Airlines       Transportation Ind.
Airborne Express        Logistics/Overnight
Verizon Comm Stock History
Company Profile and Outlook
        Revenue      EPS
 Next Time: Concept of Strategy
 Current Events
 Read Chapter 1: Basics of Strategic Management
 Read Chapter 2: Corporate Governance
 Team Project Defined
 Assign Case #1: Wal-mart Stores, Inc.


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