Are You Sure You Have a Strategy?

1. Are You Sure You Have a Strategy? Donald C. Hambrick Columbia University Graduate School of Business 1

2. Consider these statements of strategy drawn from actual documents and announcements of several companies: “Our strategy is to be the low-cost provider.” “We’re pursuing a global strategy.” “The company’s strategy is to integrate a set of regional acquisitions.” “Our strategy is to provide unrivaled customer service.” “Our strategic intent is to always be the first-mover.” “Our strategy is to move from defense to industrial applications.” 2

3. What Is Strategy?  Our central concept of how we will achieve our objectives  Our recognition of an opportunity and plan for seizing it What should it do for us?  Guide our resource allocation and daily actions  Guide our design of organizational arrangements  Provide a catalyzing “shorthand” of what we are all trying to do 2a

4. Putting Strategy In Its Place Mission  fundamental purpose  values Objectives  specific targets Strategy Our central concept of how we will achieve our objectives Strategic Analysis: C3E  Customer analysis  Competitor analysis  Company capability analysis  Environmental analysis Supporting Organizational Arrangements  structure  rewards  processes  people  symbols  activities  functional policies and profiles 3

5. The Five Major Elements of Strategy Where will we be active? (and with how much emphasis?)  Which product categories?  Which market segments?  Which geographic areas?  Which core technologies?  Which value-creation stages? Arenas What will be our speed and sequence of moves?  Speed of expansion?  Sequence of initiatives? Economic Logic Staging Vehicles How will we get there?  Internal development?  Joint ventures?  Licensing/franchising?  Acquisitions? Differentiators How will we win in the marketplace?  Image?  Customization?  Price?  Styling?  Product Reliability?  Etc.? How will we obtain our returns?  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?  Etc.? 4

6. Value-Creation Stages Stages Outsourced Stages Done In-house A biotech company Basic Research Product Development Clinical Regulatory Trials/Approvals Manufacturing Marketing/ Sales Distribution A toy company Product Development Market Research Manufacturing Marketing/ Advertising Sales Distribution/ Logistics 5 5

7. Examples of Strategic Staging a: printing equipment manufacturer with plans to expand internationally and broaden the product line Target Wide Geographic Scope Stage 2 Stage 1 • Narrow Currently Narrow Wide Product line breadth b: regional title insurance company with plans to expand nationally by acquisition and build a superior, prestigious brand  Target National Stage 3 Geographic Scope Stage 2 Stage 1 • Currently Regional Weak Strong Brand power 6

8. Economic Logic: How will we obtain returns above our cost of capital?  Pricing Leverage: a) Premium prices, b) from price-insensitive buyers, c) for product features they deem very appealing, d) and which competitors can’t readily match.  Cost Leverage: through scale through scope through replication and experience through advantageous endowments Asset Leverage: extraordinary asset turns extraordinary asset longevity brand leverage  Combinations are possible! 7

9. IKEA’s Strategy Arenas  Inexpensive contemporary furniture  Young, white-collar customers  Worldwide Arenas Staging  Rapid international expansion, by region  Early footholds in each country; fill-in later Economic Logic Staging Vehicles Vehicles  Organic expansion Wholly-owned stores Differentiators Differentiators  Very reliable quality  Low price  Fun, “non-threatening” shopping expreience Economic Logic  Economies of scale (global, regional, and individual store scale)  Efficiencies from replication 8

10. Another Example: GE Transportation Systems -- Locomotives Arenas  Diesel  Emphasize long and heavy hauls (including industrial and mining)  Americas, Asia, Middle East, Africa  Limited defensive position in Europe Staging 1:  New Model X by Year 2  Push very aggressively in Latin America and Asia  Sign Eastern Europe JVs 2:  New Model XX by Year 4  Push aggressively in Africa Throughout:  5% annual productivity gains  Wait-and-see in Western Europe Arenas Economic Logic Staging Vehicles Vehicles  Wholly-owned subs with extensive service sites  Selective JVs in Europe (including Eastern/Central) Differentiators Differentiators  Service  Mileage/operating efficiency  Safety  Operator comfort/ergonomics Economic Logic  Premium prices for superior product and service  Lowest diesel manufacturing costs (Erie factory) 9

11. Testing the Quality of Your Strategy Key Evaluation Criteria 1. Does your strategy fit with what’s going on in the environment? Is there healthy profit potential where you’re headed? Does your strategy align with the key success factors of your chosen environment (s)? 2. Does your strategy exploit your key resources? With your particular mix of resources, does this strategy give you a good “head start” on competitors? Can you pursue this strategy more economically than competitors? 3. Will your envisioned differentiators be sustainable? Will competitors have difficulty matching you? If not, does your strategy explicitly include a ceaseless regimen of innovation and opportunity creation? 4. Are the elements of your strategy internally consistent? Have you made choices of arenas, vehicles, differentiators, and staging, and economic logic? Do they all fit and mutually reinforce each other? 5. Do you have enough resources to pursue this strategy? Do you have the money, managerial time and talent, and other capabilities to do all you envision? Are you sure you’re not spreading your resources too thinly, only to be left with a collection of feeble positions? 6. Is your strategy implementable? Will your key constituencies allow you to pursue this strategy? Can your organization make it through the transition? Are you and your management team able and willing to lead the required changes? 11