what is strategy w e e k s 1 a n d 2

www.facebook.com/strategycapstone 1

What is Strategy?Weeks 1 and 2

Michael McDermottmcdermottm1@nku.edu

http://www.linkedin.com/in/michaelcmcdermottwww.facebook.com/strategycapstone

www.strategycapstone.ning.comwww.Mcdermottstrategy.wikispaces.com

www.globalbusinessstrategy.wikispaces.com

Class meeting 1

Course Objectives

• The primary aim is to develop your ability to develop your skills in key aspects of strategic planning

• The aim is to develop your ability to think in a highly analytical and logical manner

Course Objectives

• This ability can only be developed through practice

• Therefore the emphasis in this class is to encourage you to apply your newly developed skill in this classroom, but that you apply your skills through observation as you go about daily life

Course Objectives

• Sports people improve through training and applying themselves

• ….not reading about their sport

• And it’s the exact same in terms of students of business strategy

Course Objectives

• This class is a paradox

• My aim is to help you develop a key skill that will be with you for life

• So I want to keep it simple

• But at the same time be very challenging in terms of pushing you to ‘raise your game’

Lecture Objectives

• To get you thinking!

• And develop a clear understanding of the nature of strategy

• You do not obtain this by memorizing a textbook definition

www.facebook.com/strategycapstone

Strategic Planning Process

• Strategic Analysis

• Strategic Choice

• Strategic Implementation

• In my experience, the biggest problem companies face is that they suffer from a lack of focus

• Why is this the case?

• It is precisely because they focus upon strategic choice and implementation

• But refuse to commit to strategic analysis

• Even when they are presented with analysis, they often lack the courage to follow through

Lack of Focus: The Critical Issue

• Companies do themselves a huge disservice• They often do not understand the nature of their own

business• They fail to recognize their:– core competences– strongest product(s)/service(s)– Market segment with greatest potential due to buyer

preferences and nature of competition– International markets where the chances of success are

greatest

Strategic Analysis

Strategic Choice

Strategic Implementation

Becoming Focused

Knowledge = Strategic Analysis

Courage = Strategic Choice

Discipline = Strategic Implementation

Becoming Focused

Paying Lip-service to Strategic Analysis

• Often organizations undertake an exercise in SA

• However, this tends to be a self-congratulatory exercise

• Challenging and critical contributions are dismissed

• This is a futile exercise

• Most companies turn the recipe for focus on its head;

• They begin with Strategic Implementation, and then are bewildered when success is elusive;

Lack of Focus

Strategic Implementation = Confusion

Strategic Choice = Panic

Strategic Analysis = Fire-fighting

Lack of Focus: The Causes and Results

What is Strategy?

Strategy Demystified

Gaining an Understanding of Strategy

• Imagine that you are in New York

• You wish to get to Los Angeles

What are you?

• A billionaire?• A poor College student?• A parent with six children?

• Your position will have a huge bearing on the choices that are available to you and which ones are best-suited for you.

What are you?

• A company like an individual has a particular position

• Its position is its strategy

• Its choice of position is determined by what it is best-suited to (internal considerations) and its best match in the market (ie external considerations)

Strategy is all about competitive position

But too often we simply look at the steps or the choices a company makes to

achieve growth and perceive these moves as strategy

The moves are indeed important and have strategic implications

But they are not the actual strategy

Let’s go back to our trip from NY to LA

Executing our strategy?How can we get there?

• There are many options…

• What are some of these options?

• List the options

Choosing an option….

• What factors do we need to consider?

• The comfort/pleasure• The cost• The level of control• The route• The risk• The speed• The timing

These issues must also be addressed by companies as they consider their strategic

options

• Now if we consider the nature of our traveler, then we may expect some different choices

Our travelers and their choices

An extremely busy and rich IT executive

Private jet; business class

(7 hours)

A retired couple

After worldwide tour

(7 months)

An adventurous

student

Bus and train (7 weeks)

Our companies and their choices

Fortune500

Dominate global market and buy rivals

A start-up Survival

An SMEExpand

nationwide and maybe look to

export

This example

• Highlights that there is a wide range of options for some, less so for others;

• They have very different resources and this impacts upon their choices

• They also have different priorities in terms of control, risk, speed, timing.– So although the challenge was the same, different

travelers can choose very different means of getting there– They need to consider what suits them best

The Outcomes….

• Someone gets there first, but it costs the most• Others may get there last, but have the best time• Some will rue their choice• Others will be glad they chose wisely• Some may have to compromise – someone else got

the last seat in First Class• And some may never get there at all – Dad got a DUI!

The Outcomes….

• Someone gets there first, but it costs the most• Others may get there last, but have the best time• Some will rue their choice• Others will be glad they chose wisely• Some may have to compromise – someone else got

the last seat in First Class• And some may never get there at all – Dad got a DUI!

This example

• Some succeed• Some fail…• Some change their mind and decide LA is not

where they want to go….– So some decide to stop at Chicago, others at San

Diego etc• And some who get to LA, realize that they

should never have come in the first place

The Importance of Strategy• Strategy demands careful consideration of a range of

factors that enable an organization to achieve competitiveness

• But it does not guarantee success..

• Many organizations have a strategy but they are not competitive

• And others lack a coherent strategy, but yet they appear to be successful

Who Benefits from Developing a Strategy?

• A country?• An industry in a country?• A large global company?• A division in a large global company?• An SME• A coffee shop?• An individual?

A Country

• Does the USA have a strategy?• Yes/No• Do any countries have a strategy?• Yes/No• Does it matter?• Yes/No

• What is the fundamental competitive position of the U.S. in the global economy?

• And what must we do to remain strong when other nations are making rapid progress?

Porter on the USA (Oct 2008)The stark truth is that the U.S. has no long-term economic

strategy—no coherent set of policies to ensure competitiveness over the long haul. Strategy embodies clear priorities, based on understanding the strengths we need to

preserve and the weaknesses that threaten our prosperity the most. Strategy addresses what to do, but also what not to do.

In dealing with a crisis, experience teaches us that steps to address the immediate problem must support a long-term

strategy. Yet it is far from clear that we are taking the steps most important to America's long-term economic prosperity.

http://www.businessweek.com/magazine/content/08_45/b4107038217112.htm

A Good Strategy

• There needs to be logical consistency

• Too often businesses suffer because they loose sight of being logically consistent

• As this class develops, it will become very clear to you that this flaw is a commonplace

Conclusions

• Strategy is the company’s position, and also the ‘map’ for the organization

• It guides the organization• But it still allows for some freedom to take

advantages of opportunities as they arise or to take account of dangers/threats on the journey

• Strategy cannot guarantee competitiveness• But it can certainly enhance the prospects of success

Conclusions• In this class, we are going to discuss organizations

that are ‘winners’ and ‘losers’ in the market-place

• So consider companies that you believe are presently ‘winners’ and those that are ‘losers’

• We will then consider the causes of their situation and the strategy the need to sustain or transform their situation

Some Key Questions in Strategy Development

Week 2

1. Who/what are we?

1. This is our Strategy – our strategic position– This is our choice of Generic Strategy• Low-Cost • Differentiation• Focused Low-Cost• Focused Differentiation

– This is represented in our Mission Statement that is present-oriented

2. Where do we want to be?

1. Do we wish to change our Strategy or our competitive position?

2. Or simply apply similar more widely?

– In both cases we addressing our Vision which is future-oriented.

Changes in Competitive Position

• Today you think of Walmart and you think low cost

• This company wants us in the future to think ‘green’ and ‘healthy’

Changes in Competitive Position

• Yum Brands has decided to focus upon KFC (chicken), Pizza Hut and Taco-Bell (Mexican?)

• It has decided too that in order to conquer emerging markets, it cannot afford the distraction of weak performing brands– So it will divest them

Changes in Competitive Position: Toyota

1960s-

•Low cost – based on cheap labor and weak Yen;

•Fuel efficiency

•Differentiation – now has global production as domestic costs soar and Yen appreciates

•Reliability (world class manufacturing)

•Differentiations

•As before

•Plus ‘Green’ - Hybrids

Changes in Competitive Position:Singapore Airlines

1960s-

•Differentiation based on Asian service – Singapore girl

•Low crew/passenger ratio due to low labor costs

•Differentiation based on above

•Plus most modern fleet of aircraft

•Differentiation based on all of above

•Plus best in-flight entertainment, cuisine etc

Changes in Competitive Position:Haier (Chinese producer of white goods)

•Low Cost

•Transition to differentiation

•Has it worked (as per Samsung, LG, Acer, HTC)?

3. Why do we want to go there?

• Change(s) taking place in the external environment?– The macro-environment– The competitive environment– The market

• The internal environment – ie. Company-related considerations

• Or combination of both

Fortune Brands and Titleist

• Decision to divest Titleist appears due a deterioration in all aspects of the external environment

• The effect is to reduce potential for profitability – incompatible with a finance driven company – so internal drives for divestment too

4. How will we get there?

• Organic growth – the company growing through its own development

on new products/services• External growth – Mergers and Acquisitions (Married) – very costly– Joint Ventures (Engaged) – less costly– Alliances (Dating) – no ownership stake, just

partners– Licensing (social acquaintance) – low risk, payments

based upon market success

Let’s Recap on Where We are So Far

What is Strategy?

• Strategy is competitive position

– Executives though often pay scant regard to strategy

– Instead their focus is simply operational effectiveness (is the food hot; are our costs under control)

• operational effectiveness and strategy are both essential to superior performance

What is Operational Effectiveness?

• It’s all about internal performance– Better– Cheaper– Faster– Wider (ie more international)

Strategy vs OE

• OE and strategy are both essential to superior performance

• Excellence in one is not enough for enduring success or competitive advantage

Establishing Competitive Advantage

• A company can outperform rivals only if it can establish a difference that it can preserve

• It must therefore:1. Deliver greater value to customers; or2. Create comparable value at lower prices; or3. Do both

Effectiveness vs Efficient

• Greater value• Higher unit prices (eg

Apple)More

Effective• Lower unit costs• Can offer lowest prices

(eg Costco)More

Efficient

Nature of Operational Effectiveness• OE means performing similar activities better than

rivals perform them

– So the Japanese auto producers toppled their US rivals– South Koreans overtake Japanese electronics companies– Taiwanese overtake US computer companies– Chinese dominate electronics production

• Constant improvement in operational effectiveness is necessary to achieve superior profitability.

• But it is seldom sufficient

Running out of steam: the limitations of OE

• Companies that are copycats but simply exploiting differences in operational efficiency soon come undone;

• Once gaps in OE narrow, such companies struggle;

• They suffer from a distinct competitive position.

• In short, they need to learn strategy!

OE and Buyers

• Continuous improvements in OE proves of enormous benefits to buyers;

– Today we can buy a USB stick at Walmart for less than $20 that has more memory than a computer that cost $000s in the 1980s;

• But this is a nightmare scenario for companies that are sucked into damaging price wars;

– Who makes a profit selling only PCs today?

Examples of Japanese Companies and Strategy

Have Learned?• Tend to be ‘different’• Are innovative

Yet to Learn?• Imitate and emulate their

national rivals

OE and Competition

• Companies converge• They all follow the exact same path– From made-in-China to sold-in-Walmart

• And this is a race that no one wins– So let’s reduce the number of ‘runners’ – and

acquire our rivals• In a ‘buy or be bought’ world, no one enjoys

true competitive advantage

It does not have to be this way!

Competitive Strategy is about being different!

Determining Strategic Position

Activities

•Choose a different set of activities; or

•Perform similar activities differently

•Or perform different activities

•Deliver a unique mix of value

What do they offer?

• Often low cost• Because they do things differently• But in addition to that, they often ‘break the

rules’ and develop a new business model in order to better meet the needs of their target market– Consider Red Box for DVDs– Selling spectacles online

Nature of Strategic Positioning

• Means performing different activities from rivals or performing similar activities in different ways

• Competitive advantage requires developing a distinct strategic position

Porter 1996

• He cites Sega and Jiffy Lube as examples of sound strategic positioning

• Jiffy Lube offers only oil changes

• Do you use Jiffy Lube?

• Why not?

• The answer to this question perhaps also asks us to reconsider the essence of strategy

Three Types of Strategic Positioning

Variety-based positioning Based on choice of product or service varieties.

Needs-based positioning Targets needs of particular market segment(s).

Access-based positioning Often related to geography

We now get position.

But What is Strategy?

Strategy is the creation of a unique and valuable position,

involving a different set of activities.

Strategy involves trade-offs.The essence of strategy is choosing what not

to do.

OE vs SP

OE • means performing

similar activities better than rivals perform them

Strategic Positioning• Means performing

different activities from rivals or performing similar activities in different ways

“Why do so many companies fail to have a strategy? Why do managers avoid making strategic choices? Or, having made

them in the past, why do managers so often let their strategies decay and blur?”

“A sound strategy is undermined by a misguided view of competition, by

organizational failures, and especially, by the desire to grow”

The Growth Trap:“Arises when companies urge for growth results in

excessively rapid expansion and is characterized by a lack of prudence and extravagant investments” (McDermott)

“The Times They Are A-Changin’”(Bob Dylan)

StrategyThe

Dominant View

Competitive Position

StrategyThe

Emerging View

Customer Relationships

Strategy Reality?Combination

of both of the above

Social Media is not a fad

This demands a revolution in our thinking.

Strategic Analysis:Phase 1 in Strategic Planning

Michael McDermottmcdermottm1@nku.edu

http://www.linkedin.com/in/michaelcmcdermottwww.facebook.com/strategycapstone

www.strategycapstone.ning.comwww.Mcdermottstrategy.wikispaces.com

www.globalbusinessstrategy.wikispaces.com

McDermottm1@nku.edu; facebook.com/strategycapstone

Strategycapstone.ning.com

McDermottm1@nku.edu; facebook.com/strategycapstone Strategycapstone.ning.com

Structure

• Key points thus far• Introduction to Strategic Analysis• Focus upon PEST analysis

Key Points

• Strategy = competitive position

• Strategy = competitive position = choice of generic strategy (Porter)– Low cost– Differentiation– Focused low cost– Focused differentiation

Key Points

• Strategy also demands consideration of where and how a company will compete

• This refers to strategic choice – choice of grand strategy

Moving from A to B

1. This might simply be trying to maximize returns on existing operations

2. It may involve entering new markets geographically3. Or targeting new market segments with similar products4. Or targeting existing market segments with new

products/services

Key tool in considering grand strategy choice this is Ansoff’s matrix

Moving from A to B

• Or diversifying• Or buying a key rival (horizontal integration• Or buying a key supplier or buyer (vertical integration)• Or withdrawing from certain areas

(divestment/retrenchment)

Key tool in considering grand strategy choice this is Ansoff’s matrix

Moving from A to B

• Or it may involve developing a completely new business model because the traditional model can no longer deliver competitive advantage– Consider Blockbuster, Dell.

• Or it may involve moving from a niche position to a mainstream position– Consider Apple, Pepsico’s “good-for-you” products.

• Or creating a totally new market– Consider Nintendo

Traditional PC makers vs Dell’s original business model:both have had to change their business models!

The ‘smiling face’ is the model for many in electronics today

There is no-added value in in-house production so outsource it

• In order to get from A to B, an organization needs a strategy

• Strategy is our ‘mapquest directions’, our roadmap to get from our point of origin to our destination

Conclusions• Successful businesses tend to have a tight focus and are

disciplined• They have a very clear goal – or strategic intent• They remain true to their values• They make sure that decisions are consistent• They identify their core competences or key value proposition• And the impact that this has on the nature of their generic

strategy• And they then focus upon delivering their value-proposition

to their target market, and are willing to be rejected by the non-target market.

what is strategy w e e k s 1 a n d 2

strategic choicediscipline

strategic analysiscourage

strategic options26www

strategic implicationsbut

confusion strategic

nature of strategy

choice of position

strategy demystifiedwww

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