Economic Foundations of Strategy

1. Economic Foundations of Strategy Power Point Set #2

2. The Wisdom of Choice: • “To try and fail is at least to learn; to fail to try is to suffer the inestimable loss of what might have been.” • Chester Barnard, The Functions of the Executive

3. What Is Strategic Management About? • Understanding how firms create, capture, and sustain competitive advantage. • Analyzing strategic business situations and formulating strategic plans. • Implementing strategy and organizing the firm for strategic success.

4. What Is Strategic Management About? • Sustainable competitive advantage occurs when a firm implements an economic value-creating strategy of which other companies are unable to duplicate the benefits or find it too costly to imitate.

7. Position Resources & Capabilities Organization The Role of Strategy In Business is to Generate and Sustain Value via the Linkages Between Position, Resources, and Organization

8. Positioning • Scope of the Firm: • Geographic Scope • Choice of businesses (corporate portfolio analysis) • Product Market Positioning within a business • Vertical integration decisions

9. Resources • Tangible Resources • e.g., physical capital • Intangible Resources • e.g., trademarks, “know-how” • Organizational Capabilities • e.g., routines and standard operating procedures

10. Organization • Structure • Formal Definition of authority • Conflict Resolution • Systems • Rules, Routines, Evaluation and rewards • Processes • Informal communication, networks, recruitment

11. A Definition of Strategy • Strategy (Quinn, 1980): • “The pattern or plan that integrates an organization’s major goals, policies, and action sequences into a cohesive whole. A well formulated strategy helps to marshal and allocate an organization’s resources into a unique and viable posture based on its relative internal competencies and shortcomings, anticipated changes in the environment , and contingent moves by intelligent opponents.”

12. Definitions of Strategy • “The term “strategy” is intended to focus on the inter-dependence of the adversaries’ decisions and on their expectations about each other’s behavior.” • Thomas Schelling The Strategy of Conflict • “Strategy can be defined as the determination of the basic long-term goals and objectives of an enterprise, and the adoption of courses of action and the allocation of resources necessary for carrying out those goals.” • Alfred D. Chandler Strategy and Structure

14. Defining the Business: The Starting Point of Strategy • Example: Fall of the Railroads • “They let others take customers away from them because they assumed themselves to be in the railroad business rather than in the transportation business. The reason they defined their industry wrong was because they were railroad oriented instead of transport oriented; they were product oriented instead of customer oriented.” • Theodore Levitt “Market Myopia”

15. Mission Statement and Goals • It is the function of the top management team to provide the firm’s purpose or “strategic intent.” • Chester Barnard The Functions of the Executive • Alfred Sloan My Years with General Motors • Komatsu ---> “Encircle Caterpillar” • Canon ---> “Beat Xerox” • Kodak ---> “Be the leader in the imaging sector” • Coca Cola ---> “To put a Coke within ‘arms reach’ of every consumer in the world.”

16. Fundamental question of the choice of Goals: Planning for what purpose(s)? • Profitability (net profits) • Efficiency (low costs) • Market Share • Growth (e.g., increase in total assets, sales, etc) • Shareholder Wealth (dividends plus stock price appreciation) • Utilization of Resources (e.g., ROE, ROI) • Reputation • Contribution to Stakeholders (e.g., employees, society) • Survival (avoid bankruptcy)

17. The Manager’s role in balancing expectations • Business Roundtable: • “Balancing the shareholder’s expectations of maximum return against other priorities is one of the fundamental problems confronting corporate management.” • Understanding corporate strategy means understanding the competing value claims of multiple stakeholders.

18. The Manager’s role in balancing expectations • Stakeholders are the individuals and groups who can affect, and are affected by, the strategic outcomes achieved and who have enforceable claims on a firm’s performance.

20. AKey Performance Measure:Sustainable Competitive Advantage • For a company, the definition of success is superior economic performance. • To achieve superior economic performance, a firm has to create a sustainable competitive advantage (SCA). • SCA is achieved by a value-creating strategy that cannot be (easily) duplicated.

21. Key Drivers of Value Creation and Sustainable Competitive Advantage: • Generating economicvalue can be accomplished through: • REVENUE drivers • COST drivers • RISK drivers

23. The Levels of Strategy Corporate - General Electric Business - Home Appliances Functional - e.g., Production

24. Corporate Strategy • At the corporate level, value creation can occur if the individual parts of a firm are integrated into a coherent whole. • Corporate strategy is the way a company creates value through the configuration and coordination of its multi-market activities.

26. Summary “Take-aways”: • Providing PURPOSE is an important function for the executive. • One important purpose is to CREATE VALUE. • Value creation can lead to SUSTAINABLE COMPETITIVE ADVANTAGE.