CHAPTER

Part 1 Strategy Analysis

What Is Strategy and Why Is It Important?

McGraw-Hill/Irwin

Copyright 2013 by The McGraw-Hill Companies, Inc. All rights reserved .

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ChapterCase 1 The Premature Death of a Google Forerunner at Microsoft

Google founded in 1998

LO 1-1 Define competitive advantage, sustainable competitive advantage, competitive disadvantage, and competitive parity. LO 1-2 Define strategy and explain its role in a firms quest for competitive advantage. LO 1-3 Explain the role of firm effects and industry effects in determining firm performance. LO 1-4 Describe the role of corporate, business, and functional managers in strategy formulation and implementation. LO 1-5 Outline how business models put strategy into action. LO 1-6 Describe and assess the opportunities and challenges managers face in the 21st century. LO 1-7 Critically evaluate the role that different stakeholders play in the firms quest for competitive advantage.
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Two graduate students at Stanford

PageRank algorithm a clear improvement Today, it is worlds leading online search/advertising firm

Microsoft bought LinkExchange in 1998

Keywords product for search engines was shut down

Microsoft considered buying Overture Services in 2003

Gates and Ballmer passed on the deal

Yahoo buys Overture for its own search product

Microsoft launches its own search in 2009

Bing now partnered with Yahoo
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Microsoft and Google Online Search

Whats happening in our chapter opener?
Why might Microsoft have acted the way it did? If they had not killed Keywords, would Microsoft have

WHAT STRATEGY IS: GAINING AND SUSTAINING COMPETITIVE ADVANTAGE

What Is Competitive Advantage?

Superior performance relative to competitors

Examples: Google, Duke Basketball, Pfizers Lipitor

beat Google to search and linked ads?

Why is Google so successful at online search while

What Is Strategy?
Goal-directed actions to gain and sustain competitive

Yahoo struggled and partnered with Microsoft?

With hindsight, it appears that Microsoft made a

advantage
NOT a zero-sum game

Win win scenarios co-opetition JCPenney vs. Neiman Marcus Southwest Airlines vs. Delta Song
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strategic error. What could they have done differently?

Requires trade-offs for strategic positioning

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Strategy as a Theory of How to Compete Provides a manager's roadmap

Apple Newton flops in 1993

LO 1-1 Define competitive advantage, sustainable competitive advantage, competitive disadvantage, and competitive parity. LO 1-2 Define strategy and explain its role in a firms quest for competitive advantage. LO 1-3 Explain the role of firm effects and industry effects in determining firm performance. LO 1-4 Describe the role of corporate, business, and functional managers in strategy formulation and implementation. LO 1-5 Outline how business models put strategy into action. LO 1-6 Describe and assess the opportunities and challenges managers face in the 21st century. LO 1-7 Critically evaluate the role that different stakeholders play in the firms quest for competitive advantage.

PalmPilot learned from Newtons mistakes

iPhone a huge success in 2009 Sam Waltons assumptions about low prices & high

volume
Auto industry differences between U.S. & Japan

Palm Video
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Performance Varies Across Industries

(above-normal returns)
20% 15% 10% 5% 0% (5%) (10%) (15%) Toiletries/Cosmetics Pharmaceuticals Soft Drink Tobacco Food Processing Household Products Electrical Equipment Financial Services Specialty Chemicals Newspaper Integrated Petroleum Electric Utility- East Bank Retail Store Telecom Tire & Rubber Electric Utility- Central Medical Services Machinery Auto & Truck Computer & Peripheral Paper & Forest Air Transport Steel

EXHIBIT 1.1

Industry, Firm, and Other Effects Explaining Superior Firm Performance

Industry vs. Firm Effects in Performance Astute managers create superior performance Making important trade-offs - Toyotas lean manufacturing

Reproduced from Ghemawat (2000), Strategy and the Business Landscape

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EXHIBIT 1.2

Performance Varies Within Industries

Discount General Merchandise Retail Industry
0.25 20.2% 0.2 17.1% 11.4%

What Is Strategy?

Definition: Strategy is the quest to gain and sustain

competitive advantage. It is the managers theories about how to gain and sustain competitive advantage. It is about being different from your rivals.
Industry Average 9.4%
7.1%

ROA 1988 - 1992

0.15 0.1 0.05 0

It is about creating value while containing cost. It is about deciding what to do, and what not to do. It combines a set of activities to stake out a unique position. It requires long-term commitments that are often not easily reversible.
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-1.2% -0.05 -5.5% -0.1

WalMart

Family Dollar Consol'd Fred's Dollar General Stores

Jamesway

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What went wrong?

What Strategy Is NOT.

Raking in every penny the firm can get
Profit is a

Operational effectiveness
Enterprise Resource

consequence of good strategy, it is NOT the main goal!

Planning (ERP)
Benchmarking Six Sigma Necessary but not

sufficient such as Lean Manufacture

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Low Cost vs. Differentiated

Differentiated P-C
V P C

Choice of Strategy Does Not Imply Profitability

V P
=

Operational Effectiveness : Necessary but not sufficient for competitive advantage

Low Cost P-C

V P

V P

C C

Over time, firms with different operational effectiveness are able to accumulate more resources

Strategy Across the Levels

Where to Compete?
Should GE move more

EXHIBIT 1.3

Strategy Formulation and Implementation Across Levels: Corporate, Business, and Functional Strategy

CORPORATE STRATEGY

aggressively into the health care industry?

How to Compete?
Should GE jet engines

have better fuel efficiency than Rolls Royce?

BUSINESS STRATEGY FUNCTIONAL STRATEGY

How to Implement?
Should GE human

resources recruit more science graduates?

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BUSINESS MODELS:
PUTTING STRATEGY INTO ACTION
Razor-blade model Subscription model

EXHIBIT 1.4

Competing Business Models: Google vs. Microsoft

How is the firm going to make money to continue operations? Whats happening now between Microsoft & Google?
Business models in opposite directions

Microsoft

Operating Systems

Software Apps

Online Search Google

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STRATEGY IN THE 21ST CENTURY

Accelerating Technological Change
84 years for half of U.S. families to own a car 28 years for half to own a TV 6 years for an MP3 player

EXHIBIT 1.5

Accelerating Speed of Technological Change

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STRATEGY IN THE 21ST CENTURY

Accelerating Technological Change
Why are we seeing this increased rate of change?

STRATEGY IN THE 21ST CENTURY

A Truly Global World
BRIC countries have 40% of earths population IBM has less than 30% of employees in the U.S.

What are the strategic implications here?

Bottom of the pyramid business opportunities

Thomas Friedman-Flat World 1-24 1-25

EXHIBIT 1.6 Geographic Sources of IBM Revenues, 2010

STRATEGY IN THE 21ST CENTURY

Future Industries
HEALTH CARE

In the U.S., over 16% of GDP and still growing

GREEN ECONOMY

Potentially large growth in energy efficiency and technologies

WEB 2.0

Is IBM still a U.S. company ?

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Interactivity and using collective intelligence on the Internet

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EXHIBIT 1.7

Conceptual Depiction of Oil Prices and Predicted Trend

STRATEGY HIGHLIGHT 1.1

Threadless: Leveraging Crowdsourcing to Design Cool T-Shirts

Online apparel company

Started in 2000 by 2 students with $1,000 Prosumers a hybrid supplier/customer

Shirt designs are submitted by the community Designs are voted on by the online community Only winning designs are produced & sold

Threadless Interview 1-28 1-29

Threadless: Strategy Highlight 1.1

Whats going on with this firms business model? How is it different than other clothes retailers? How is it the same? Other partners with Threadless?
Dell Computer laptop exteriors Thermos lunch boxes Griffin Technology iPhone covers
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LO 1-1 Define competitive advantage, sustainable competitive advantage, competitive disadvantage, and competitive parity. LO 1-2 Define strategy and explain its role in a firms quest for competitive advantage. LO 1-3 Explain the role of firm effects and industry effects in determining firm performance. LO 1-4 Describe the role of corporate, business, and functional managers in strategy formulation and implementation. LO 1-5 Outline how business models put strategy into action. LO 1-6 Describe and assess the opportunities and challenges managers face in the 21st century. LO 1-7 Critically evaluate the role that different stakeholders play in the firms quest for competitive advantage.
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STAKEHOLDERS
Successful business generates societal value Stakeholders are affected by firms actions
Internal External

EXHIBIT 1.8 Internal and External Stakeholders

Vary by industry
Autos Investment banking

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THE AFI STRATEGY FRAMEWORK

Analyze (A)
Getting Started; External & Internal Analysis

Exhibit 1.9

Part 1 Strategy Analysis

Chapters 1 thru 5

Formulate (F)
Business and Corporate Strategy

Chapters 6 thru 10

Implement (I)
Organizational Design & Corporate Governance

Chapters 11 thru 12
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CHAPTERCASE 1 Consider This

Microsoft has a new partner in the competition for a search engine with Google FACEBOOK In fall 2010, Mark Zuckerberg announced their surprising decision to partner with the really scrappyunderdog Bing !! The partners are aiming to make search more social Our approach is about the speed of getting things donenot the speed of high volume of results

Take-Away Concepts
LO 1-1 Define competitive advantage, sustainable competitive advantage, competitive disadvantage, and competitive parity. Competitive advantage is relative rather than absolute. To obtain a competitive advantage, a firm must either create more value for customers while keeping its cost comparable to competitors, or it must provide value equivalent to competitors but at a lower cost. A firm dominating competitors over time has sustained competitive advantage. A firm that continuously underperforms its rivals or the industry average has a competitive disadvantage. Two or more firms that perform at the same level have competitive parity. Strategy is goal-directed actions in quest of competitive advantage.

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Take-Away Concepts (contd)

LO 1-2 Define strategy and explain its role in a firms request for competitive advantage. Strategy is the set of goal-directed actions a firm intends to take in its quest to gain and sustain competitive advantage. An effective strategy requires that strategic trade-offs be recognized and addressede.g., between value creation and the costs to create the value. Managers strategic assumptions are an outflow of their theory of how to compete. Successful strategy requires three integrative management tasksanalysis, formulation, and implementation. When managers align their assumptions closely with competitive realities, they can create and implement successful strategies, resulting in value creation and superior firm performance. When managers theories about how to gain and sustain competitive advantage do not reflect reality, their firms strategy will destroy rather than create value, leading to inferior firm performance.
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Take-Away Concepts (contd)

LO 1-3 Explain the role of firm effects and industry effects in determining firm performance. A firms performance is more closely related to its managers actions (firm effects) than to the external circumstances surrounding it (industry effects). Firm and industry effects, however, are interdependent and thus both relevant in determining firm performance. LO 1-4 Describe the role of corporate, business, and functional managers in strategy formulation and implementation. Corporate executives must provide answers to the question of where to compete (in industries, markets, and geographies), and how to create synergies among different business units. General (or business) managers must answer the strategic question of how to compete in order to achieve superior performance. They must manage and align all value chain activities for competitive advantage. Functional managers are responsible for implementing business strategy within a single value chain activity.

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Take-Away Concepts (contd)

LO 1-5 Outline how business models put strategy into action. A business model must translate strategy into effectively implemented tactics and initiatives that make money for the firm. LO 1-6 Describe and assess the opportunities and challenges managers face in the 21st century. Ever-faster technological changes in a global marketplace. Health care, green economy, & Web 2.0 are likely good growth opportunities.

Take-Away Concepts (contd)

LO 1-7 Critically evaluate the role that different stakeholders play in the firms quest for competitive advantage. Stakeholders are individuals or groups that have a claim or interest in the performance and continued survival of the firm; they make specific contributions for which they expect rewards in return. Internal stakeholders include stockholders, employees (including executives, managers, and workers), and board members. External stakeholders include customers, suppliers, alliance partners, creditors, unions, communities, and governments at various levels. Some stakeholders are more powerful than others, and may extract significant rewards from a firm, so much so that any firm-level competitive advantage may be negated.

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AFI strategy framework Bottom of the pyramid Business model Competitive advantage Competitive disadvantage Competitive parity Co-opetition Crowdsourcing Externalities

Firm effects Industry effects Stakeholders Strategic business unit (SBU) Strategic management Strategy Sustainable competitive advantage

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