Managerial Economics II Business Strategy Lecture 4 What

Managerial Economics II: Business Strategy Lecture 4: What is Strategy? Prof. Sarah Wolfolds Cornell University Dyson School of Applied Economics and Management February 7 th, 2017 Cornell Business

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Class Objectives/Plan 1. Role of Strategy in Success 2. Framework for strategy analysis 3. Evolution of Strategic Management 4. What is Strategy? 5. Lady Gaga’s Strategy 6. Apple and PC Strategy 7. Strategy in non-profits

Ingredients of Success

What Makes a Successful Strategy? Successful strategy EFFECTIVE IMPLEMENTATION Long term, simple and shared objectives Understanding of competitive environment Objective appraisal and allocation of resources

Strategy as Link b/w Firm-Environment

…versus SWOT Count (n=87) SWOT Strategy-as-Link

Origin of Strategy § Sun Tzu (The Art of War, 776 B. C. ) – Victory=β(Calculations before battle) – Strategy=pre-battle calculations

Brief History of Business Strategy

What is Strategy? § Strategy is about the actions a firm takes to achieve its objectives – Objectives can be to maximize profit, innovate, increase market share, improve quality of life, make a difference in the world, etc. – Objectives determine two aspects of firm’s strategy: what businesses and activities the firm should be in (corporate strategy) and how to compete within that business (business strategy) – Our job is to determine which strategies best align the firm with its environment to achieve its objectives § Strategic analysis helps us to understand… – How the industry is structured: buyers, suppliers, substitutes, rivals, and entrants – The interrelated activities that are required to create value – The sources of competitive advantage – The resources & capabilities required to successfully achieve objectives

Strategy versus Tactics § Question: Last class, we discussed Kroger implementing scanners to help guide customers. Is this a strategy or a tactic?

Strategy versus Tactics What is strategy? Mission Question: Other examples of Vision/Strategy/Tactics to Support this Mission? Vision Strategy Tactics Dyson School: “Our Business is a Better World. ” Professors use research as a chance to inform managers and bring this to the classroom. Promote professors who publish in policy journals and hire ones with industry experience. Add a section to the website on how to apply for visiting professor jobs from industry.

Strategy versus Tactics What is strategy? Strategy consists of a series of initiatives that seek to fulfill the organization’s mission by making the vision come true Strategy must be supported by tactics that are: • • • Specific Measurable Achievable Realistic Time constrained

Firm’s Goals and Strategy Industry Attractiveness Which business should we be in? Corporate Strategy Strategic Objective How do we make money? How do we provide best product/service? How do we make a difference? Competitive Advantage How should we compete? Business Strategy

Microeconomic Foundations Firm’s objective is profit maximization (supernormal profits/rents) Q: What is the underlying source of economic rents? – A: Incomplete markets

The Efficient-Market Principle “In perfectly efficient markets, no firm realizes economic rents” Or, more colloquially… “Attractive situations don’t last long” § Existence of economic rents suggest some type of market inefficiency § Our task is to identify the sources of market imperfections (opportunities) and the strategies that enable a firm to capitalize on them – Industry structure and firm’s position within the industry – Firm-specific resources & capabilities

Source of Economic Rents Industry Structure Resource-Based View § Based on industrial organization economics § Reaction to IO perspective § Premise that industry structure matters most § Some industries are more profitable than others § Rents due primarily to barriers to competition § Premise that internal capabilities matter § Rents due to barriers to resource acquisition and imitation § Some firms are more profitable than others

Elements of Strategy - Diagnosis Elements of strategy – Diagnosis Environment • Market environment • • Competitors Consumers Suppliers … • Non-market environment • • • Government The press NGOs Society at large …

Elements of Strategy - Diagnosis Elements of strategy – Diagnosis Capabilities • Activities • What are we good at? • What are we superior at? • Assets • What do we own that is valuable? • What do we know that is valuable?

Strategy vs. Operational Effectiveness Question: Is pursuing Operational Effectiveness a strategy? Why or why not?

Approaches to Strategy

Activity System

Trade-offs § Question: Why are trade-offs important for a good strategic position?

Porter’s Generic Strategies Elements of strategy – Formulation Cost leadership Differentiation

Porter’s Generic Strategies Elements of strategy – Formulation Focus

What comprises a strategy? § A firm strategy specification includes a determination of and a cohesiveness between: 1. 2. 3. 4. The market in which the firm will compete (corporate strategy) The level of investment The functional areas needed to compete in the market The strategic assets/competencies that underlie the strategy and provide the competitive advantage

Where to locate § A market is: • A group of individuals or organizations (i. e. , potential buyers) having the willingness and ability to buy goods/services to satisfy a want or need § An industry is: § A group of firms that supplies a market

Business scope § Defined by: – Products it offers (and chooses not to offer) – Markets it seeks to serve (and not serve) – Competitors to compete with (and not) – Level of vertical integration

Level of investment • Invest to grow • Invest to maintain existing position • Minimizing investment • Recover assets by liquidating or divesting the business

Functional area strategies § The specific way to compete will usually be characterized by competencies and in one or more functional area plans/strategies: – – – Product Pricing Distribution Manufacturing Information technology § A strategic competency (asset) is: – Something a business unit does (has) that allows it to perform exceptionally well relative to competitors and leads to a competitive advantage

Other characteristics of firm strategy § Considers past, current and future states of the firm, industry and market – Where were/are we? – Where do we want to go? – How will we get there? § Clear articulation provides managers with objectives

Strategy is not myopic

Multiple Roles of Strategy

Role of Analysis in Strategy Making § Strategy analysis improves decision processes, but doesn’t give answers. § Strategy analysis assists us to identify and understand the main issues. § Strategy analysis helps us to manage complexity. § Strategy analysis can enhance flexibility and innovation by supporting learning.

Applying Strategy Analysis

Two Key Strategy Perspectives § Strategy as Position (Five Forces) – Which industries/markets are most attractive and why? – Competitive advantage based on industry position (e. g. , cost or differentiation) – Tightly integrated activity system, often with other players in the industry (e. g. , suppliers, customers, partners, etc. ) – Strength through rigidity within market, but slow to adapt – Objective is to establish strong position and maximize profit § Strategy as Resources & Capabilities (RBV) – How to identify and develop/acquire unique and inimitable resources & capabilities? – Identify markets to leverage existing resources & capabilities – Strength through ability to enter new markets, but slow to develop new resources & capabilities – Objective is to establish sustainable competitive advantage

Lady Gaga’s Strategy § Take a few minutes to read the articles passed out. § Then, in small groups consider the following questions: 1) What is her strategy? 2) If you were her manager, would you advise her to perform at the Superbowl? Why or Why not? 3) Do you think her Superbowl performance was good for her strategy?

Lady Gaga’s Strategy

PC Industry Analysis § What components make the whole product? – Processor & other hardware, operating system & other software, etc. – Most of these are purchased by PC manufactures from suppliers § What are the consumers like? – Access to (near perfect) information and most are very price sensitive – Consumers can easily shop around for lowest price § Are there many substitute products? – Depends upon the tasks, but tablets and smartphones are real threat § What’s rivalry like? – Largely undifferentiated product market where basis for competition is low cost – Intel and Microsoft, as well as consumers capture value… not PC manufacturers

But what about Apple? § Why has Apple been so successful in the PC industry? – Buyers § Design & image, features, easy UI, brand § Niche segment with high demand high WTP – Suppliers § Intel CPU, but proprietary OS and applications cut out MS – Rivalry & Entry § Impossible to replicate Apple’s brand (demand) – Substitutes § Apple is leading the charge with i. Pod, i. Phone and i. Pad

Apple’s Strategy § “The Company is committed to bringing the best user experience to its customers through its innovative hardware, software, peripherals, and services. The Company’s business strategy leverages its unique ability to design and develop its own operating systems, hardware, application software, and services to provide its customers new products and solutions with superior ease-of-use, seamless integration, and innovative design. ”

PC Firm Performance (2012) PC Market Share Q 4 2012 Operating Profit from PC Sales Q 4 2012 $1, 200, 000 Others 22. 7% Dell 21. 4% $900, 000 Acer Lenovo $600, 000 HP Dell Apple 13. 6% HP 27. 0% $300, 000 Acer 6. 5% Lenovo 8. 9% $0 Mac Top PC Vendors

Share of Total Value for PCs vs. Macs

Apple’s Strategy § How sustainable is Apple’s PC strategy? – Competes in a niche market with extremely high WTP and very few serious rivals – From <3% market share in 2008 to >13% now – Is sustainability of Mac strategy tied to PC industry? § What other industries does Apple compete in? – – – Digital media players Smart phones Tablets Home entertainment 72% of Apple’s revenue comes from i. Phone & i. Pad

Strategy in Not-For-Profits

End of Lecture § Thursday: What is Strategy? II – Grant, Contemporary Strategy Analysis, Chapter 2, “Goals, Value, and Performance” – Mintzberg (1987), “Crafting Strategy, ” Harvard Business Review. – Collis & Rukstad (2008), “Can You Say What Your Strategy Is? ” Harvard Business Review. *Posted on Blackboard and Piazza § Assignments: – Reading Questions #3** – **Sent via e-mail this afternoon