Agenda: January 10, 2003

Introduction

Syllabus

Class Overview / Intro to Strategy

What is Strategy? (Porter article)

Current Events

NotecardsName

Phone Number

E-mail Address

Major & Class Standing

Career or Personal Interest(s)

Work Experience (industry, length of time)

Business Strategy and Policy

Business Strategy and Policy

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 planIn this context, the objective of strategy is to create and sustain competitive advantage for the firm.

Ideally, You should have a good “fit” between your internal

capabilities and the external requirements from the environment.

Your strategy should take advantage of your strengths.

Sustained Competitive Advantage

Above-Average ReturnsReturns in excess of what an investor expects to earn from other investments with similar risk

Occurs when a firm develops a strategy that competitors are not simultaneously implementing

Provides benefits which current and potential competitors are unable to duplicate

Strategic CompetitivenessAchieved when a firm successfully formulates and implements a value-creating strategy

What is this course all about?

Strategy Relates A Business To Itself and Its Environment

Mktg. OpsStrategy

Finance

Sales H.R.

Competitive Environment

GovernmentRegulation

Technology

IndustryEnvironment

National/Int’l Economies

OtherCompetitors

RelatedIndustries

Model of Strategic Management

Analysis/Scanning

External Analysis (Chapter 3)

Internal Analysis (Chapter 4)

Strategy Implementation

Organizing (Chapter 8)

Staffing

(Chapter 9)

Strategy Formulation

Business Level (Chapter 5)

Corporate Level (Chapter 6)

Functional Level (Chapter 7)

Evaluation & Control

Metrics (Chapter 10)

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:

Gap

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 challenges?

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.

Hypercompetition

JIT, TQM, Outsourcing (imitable??)

Present

Time

Horizon

Long-term

Porter’s Article: Operational Effectiveness vs. Strategy

Operational Effectiveness Performing similar activities better than rivals perform them (charge higher price or reduce cost)Possibility of diffusion

Strategic PositioningPerforming different activities from rivals or performing similar activities in different waysUnique activities

Total Quality Management

Emphasis on organizational commitment to Customer

Continuous improvement of every process

Data-driven, problem-solving approach

Empower employees and teams

Productivity Frontierhigh

low

low

high

Productivity Frontier

Relative Cost Position

Nonpri

ce b

uyer

valu

e d

eliv

ere

d

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 advantage?

Interest Rate (NPV>0)

Industry average level

Closest competitor

Trade-Offs

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 positioningBased on product or services offering rather than customer segmentation (Jiffy-lube)

Needs-based positioningTarget customer strategy (Bessemer Trust vs. Citibank)

Access-based positioningBased on set activities needed to reach market (Carmike)

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 “coherent.”

The First Rule of Strategy

A Good Strategy Is “Coherent.”Functional pieces of strategy support the whole

Southwest Airlines, American, & Continental Airlines

Oper.Strateg

y

Finance

Acctg. H.R.

Mktg.

Coherence

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.

Fit orCoherence

Competitive Advantage

Sustainability

+

+

Discussion Questions

How does only flying 737s lower Southwest’s costs?

Why Can’t Continental Imitate Southwest?

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 AirlinesLow Price

Short Routes

No Frills

Point-to-Point

One Aircraft - Boeing 737

High Aircraft per Route

No Meals

Flexible/ Lower Staffing

Price-sensitive customers

Continental AirlinesPremium Priced

Short, Long, & Int’l

Variety

Hub & Spoke

Multiple Aircraft

Low Aircraft per Route

Meals & Service

Higher Staffing (Unions)

Comfort-sensitive customers

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 discusses?

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 strategy.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

Summarize

Cases & Industries

Wal-mart Stores, Inc. Retail IndustryRCA Records Entertainment Ind.American Airlines Transportation Ind.Airborne Express Logistics/Overnight Delivery

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.

WEBSITE: www.sba.pdx.edu/faculty/stephens/ss.html