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Chapter 1

Introducing Strategic
Management

OBJECTIVES

1 Understand what a strategy is and identify the


difference between business-level and corporatelevel strategy
2

Understand the relationship between strategy


formulation and implementation

3 Describe the determinants of competitive advantage


4 Recognize the difference between a fundamental
and a dynamic competitive advantage
5 Understand why we study strategic management

A TALE OF TWO STORES

Sears
launches
catalog
business

Takes control of
production and
distribution

Rapid growth,
driven by endbased locations
and companycontrolled factories

Experts believe
Sears way was
the only way to
compete The
paragon of
retailers

Financial
trouble; sells off
all non-retail
businesses

Acquired
by KMart

1970
1891

1924
Moves into on-premise
retailing/General Robert
Wood takes over

1960

1980

1990

2000 2005

Expands into banking,


investments, real estate
services, and insurance

Sam Walton opens


first Wal-Mart with
focus on low-prices

Dizzying
growth

1962 1970

1980

30 stores located in
one-horse towns which
everybody else was
ignoring; Sam Walton

Perfects model; grows;


expands into new markets
(international) and store
concepts (Sams clubs)

A Firms performance
is directly
related to the
quality of its
strategy and
its competency in implementing it

2000
Invests $500 million in
inventory management
technology

TWO RETAILERS AT A GLANCE

Sears

Wal-Mart

Year founded

1891

1962

Stores 1980
Stores 2004

864
2026

Revenues 1980
Revenues 2004

$25,194 million
$36,100 million

Net profits 1980


Net profits 2004

606M (2.4% return on sales)


507M (-1.4% return on sales)

$55 M(3.3% return on sales)


$10,267 M
(3.6% return on sales)

Market capitalization 1980


Market capitalization 2004

USD 4.8 billion


USD 12.2 billion

USD 1 billion
USD 200.2 billion

600
5289
$1,643 million
$285,222 million

A TALE OF TWO RETAILERS PERFORMANCE MEASURES


USD millions

THREE OVERARCHING THEMES

Implementing a good
strategy is at least as
important as creating
one, yet many
managers give too
little thought to
implementation

To succeed,
the formulation
of a good strategy
and its implementation should be
inextricably
connected

Firms and
industries are
dynamic in
nature

Strategic leadership is essential if a


firm is able to both
formulate and implement strategies that
create value

Strategic leadership
is responsible for

making
substantive resource
allocation decisions
and

developing keystakeholder support


of the strategy

We need to see a firms competitive position, not as a snapshot, but


as an ongoing movie

STRATEGY

Strategos: the generals view

Holistic big picture


General

Lower officer (e.g., supply logistics


infantry, heavy armored vehicles)

Tactical details

THE STRATEGIC MANAGEMENT PROCESS


Strategic analyses

Internal
External

Strategy
Vision and
mission

Fundamental
organizational
purpose

Organizational
values

Arenas
Vehicles
Differentiators
Staging
Economic logic

The central, integrated,


externally oriented
concept of how a firm
will achieve its
objectives

Implementation
levers
and
Strategic
leadership

QUESTIONS OF CORPORATE-LEVEL AND BUSINESS-LEVEL STRATEGY


Unit of measure

Corporate-level strategy should ask

In which markets do we compete today?


In which markets do we want to
compete tomorrow?

How does our ownership of a business


ensure its competitiveness today and in
the future?
Business-level strategy should ask

How do we compete in this market


today?

How will we compete in this market in


the future?

STRATEGY AND IMPLEMENTATION ITERATE

Strategy:
The process
of deciding
what to do

Compete as
discount retailer
in rural markets

WAL-MART EXAMPLE

Leverage inventory
and sourcing systems
to be low-cost leader

Implementation:
The process of
performing all the
activities necessary
to do what has been
planned

Invest heavily in
organizational structure,
systems, and processes

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UNPLANNED ACTIONS CAN DRIVE STRATEGY

Intels original focus


(1970s & 1980s)
Design and manufacture
of Dynamic, RandomAccess Memory Chips
(DRAM)

Focus on microprocessor segment

By 1984, 95%
of Intel revenue
came from the
microprocessor
segment

Unplanned
experimental
venture to make
microprocessors
for Busicom, a
Japanese
calculator maker

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BUSINESS STRATEGY DIAMOND


Arenas

Where will we be active? ( and with

Arenas

Staging

What will be our speed and


sequence of moves?
Speed of expansion?
Sequence of initiatives

Staging

Economic logic

How will returns be obtained?

Lowest costs through scale


advantages?
Lowest costs through scope
and replication advantages
Premium prices due to
unmatchable service?
Premium prices due to
proprietary product features?

Economic
logic

how much emphasis?)


Which product categories?
Which channels?
Which market segments?
Which geographic areas?
Which core technologies
Which value-creation strategies?

Vehicles

Vehicles

How will we get there?

Internal development?
Joint ventures?
Licensing/franchising?
Experimentation?
Acquisitions?

Differentiators
Differentiators

How will we win?

Image?
Customization?
Price?
Styling?
Product reliability?
Speed to market?

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PROFITABILITY AND MARKET VALUATION OF US AIRLINE INDUSTRY


Profitability

Market valuation

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JET BLUE STRATEGY

Arenas

Low fare commercial air carrier


Underserved but over-priced US cities
Start from scratch and achieve all growth

Vehicles

internally (i.e., do not purchase a regional airline)

Objective
To bring
humanity
back to air
travel

High level of service compared to low fare competitors


Differentiators

(e.g., leather seating, satellite TV)

Grow from one route between two cities to serving 20


Strategy

cities in just 3 years

Secure cost advantage by being willing and able to


Economic logic

perform key tasks differently


One type of plan
JFK home base
Secondary location

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GOALS OF STRATEGY IMPLEMENTATION

1 To make sure strategy formulation is


comprehensive and well informed
2 To translate good ideas into actions
that can be executed (and sometimes
to use execution to generate or
identify good ideas)

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IMPORTANCE OF EXECUTION

The important decisions, the


decisions that really matter, are
strategic . . . [But] more important
and more difficult is to make
effective the course of action
decided upon.
Peter Drucker

16

FRAMEWORK FOR STRATEGY IMPLEMENTATION

Key Factors of Strategy Implementation


Implementation levers

Intended
Strategy

Organizational structure
Systems and processes
People and rewards

Realized
and
Emergent
Strategies

Strategic leadership

Lever- and resource-allocation decisions


Decision support among stakeholders

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IMPLEMENTATION LEVERS
Implementation
levers

Description

Organizational
structure

Structure is the manner in which responsibilities, tasks, and people are


organized. It includes the organizations authority structure, hierarchy,
units, divisions, and coordinating mechanisms

Systems and
processes

Systems are all the organizational processes and procedures used


in daily operations. These include control and incentive systems,
resourceallocation procedures, information systems, budgeting,
and distribution

People and
rewards

The people and rewards lever points to the importance of using all
organization members to implement a strategy. Competitive advantage
is generally tied to your human resources. Successful implementation
depends on having the right people and then developing and training
them in ways that support the firms strategy. In addition, rewards how
you pay your people can accelerate the implementation of your
strategy or undermine it

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COMPETITIVE ADVANTAGE

Competitive
Advantage: a
Firms ability to
create value in a
way that its
rivals cannot

Key question:
how do Firms
create sustained
above-average
returns?

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THREE PERSPECTIVES OF COMPETITIVE ADVANTAGE

Internal
Often called the resource
view, contends that firms
are heterogeneous
bundles of resources and
capabilities and firms with
superior resources and
capabilities enjoy
competitive advantage
over other firms. This
advantage makes it
relatively easier to achieve
consistently higher levels
of performance

External
Also called the positional
view, contends that
variations in a firms
competitive advantage and
performance are primarily
a function of industry
attractiveness. Companies
should therefore either (1)
position themselves to
compete in attractive
industries or (2) adopt
strategies that will make
their current industries
more attractive

Dynamic
Suggests that in dynamic,
rapidly changing markets,
a firms current market
position is not an accurate
prediction of future
performance. Instead, we
look at the past for clues
about how the firm arrived
at its current position and
to future trends both
internal and external in
an effort to predict the
future landscape

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SUMMARY

1 Understand what a strategy is and identify the difference


between business-level and corporate-level strategy
2 Understand the relationship between strategy formulation
and implementation
3 Describe the determinants of competitive advantage
4 Recognize the difference between a fundamental and a
dynamic competitive advantage
5 Understand why we study strategic management

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REVIEW QUESTIONS

What is strategic management?


What are the key components of the strategic management process?

How does business strategy differ from corporate strategy?


What is the relationship between strategy formulation and strategy implementation?
What are the five elements of the strategy-formulation diamond model?
What are the internal and external perspectives on competitive advantage?
What are the fundamental and dynamic perspectives on competitive advantage?
Why should you study strategic management?

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GROUP ACTIVITY

Identify the characteristics of a firm at which group members


would like to work.

Then select an example of a firm that fits your description.


What is the difference between business and corporate
strategy at this firm?

How could this difference affect the experiences and


opportunities that you might gain by working for this firm?

Finally, taking advantage of your insight into the firms strategy,


construct a high-impact job-application cover letter.

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GROUP ACTIVITY

Identify a firm that may be thinking of expanding


into new international markets.

Apply the staging element of the strategy


diamond to the firms expansion opportunities or
plans.

Which markets should it target first and why?


How will international expansion be related to the
firms business and corporate strategies?

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