THINKING STRATEGICALLY The Concept of Strategy and the

THINKING STRATEGICALLY: The Concept of Strategy and the Pursuit of Sustained Superior Profits

Business Proposition Profits = Quantity (Revenue - Cost) MARGIN 3 most fundamental variables in Business

Domain of Strategy • strategic competitiveness and above normal returns • concerns managerial decisions and actions which materially affect the success and survival of business enterprises • involves the judgment necessary to strategically position a business and its resources so as to maximize long-term profits in the face of irreducible uncertainty and aggressive competition • strategy is the linkage between a business and its current and future environment

Key Characteristics of Strategic Decisions l What makes a decision strategic? • decision-making in the face of irreducible uncertainty • requires irreversible commitments. . . involves allocation of sunk investments ($, time, tangible & intangible resources) • requires choice and trade-offs • multi-functional in scope/consequences • entrepreneurial theorizing/future oriented • infrequent and non-recurring • dealing with competition • concerning the external environment. . . primarily product/market choices

Definitions • The determination of the long run goals and objectives of an enterprise, and the adoption of courses of action and the allocation of resources necessary for carrying out these goals • Alfred Chandler, Strategy and Structure

Distinguishing Strategy from Tactics • Strategy is the overall plan for deploying resources to establish a favorable position • Tactic is a scheme for a specific maneuver

Common Elements in Successful Strategy EFFECTIVE IMPLEMENTATION Long-term, simple and agreed upon objectives Profound understanding of the competitive environment Objective appraisal of resources $ Source: Adapted from Robert S. Grant, 1991

Concepts of Firm Performance • firm survival • accounting profits (ROA, ROE, ROS) • surplus of revenues over expenses • economic profit/rent (economic value added, positive NPV) • normal return on capital • abnormal return - surplus after all inputs • shareholder value/market value…(EVA, Tobin’s q) • Change in market value over time

Sources of Superior Performance Above Normal Profits (in Excess of the Competitive Level) Avoid Competitors Attractive Industry Attractive Strategic Group Attractive Niche Entry Barriers Mobility Barriers Isolating Mechanisms Be Better Than Competition Cost Advantage Differentiation Advantage

Elements of a Strategy 1. BUSINESS DEFINITION Customer Needs Technology Products Geographic Scope 2. BUSINESS STRATEGIC INTENT Direction Rate Priorities

Elements of a Strategy 3. FINANCIAL TARGETS Short-term Long-term ROA ROE ROS 4. SOURCES OF COMPETITIVE ADVANTAGE Reputation and Consumer Loyalty Brand name Producer Learning Economies of Scale and/or Scope Location Access to lower cost factors of production Distribution and Shelf-space etc.

Elements of a Strategy 5. KEY STRATEGIC DIMENSIONS Product line Specialization Brand Identification Push vs Pull Marketing Selling Approach Distribution and Channel Selection Product Quality Technological leadership Vertical Integration Cost Position Customer Service Price Policy Financial Leverage Relationship with Parent Company, if any

Elements of a Strategy 6. VALUE-ADDING ACTIVITIES Research Development Procurement Raw Material Processing* Intermediate Production* Final Production* Marketing Selling Distribution* Customer Service* * For service businesses use Production Operations, Support Operations, and Delivery Operations instead.

Elements of a Strategy 7. COMPETITIVE STRATEGY Competitor A Competitor B Competitor C Competitor D etc.

Levels of Strategy • Corporate strategy. . . defines the scope of the business in terms of the industries and markets in which it competes. • includes decisions about diversification, vertical integration, acquisitions, new ventures, divestments, allocation of scarce resources between business units • Business strategy. . . is concerned with how the firm competes within a particular industry or market. . . to win a business unit must adopt a strategy that establishes a competitive advantage over its rivals. • Functional strategy. . . the detailed deployment of resources at the operational level

Levels of Strategy CORPORATE STRATEGY BUSINESS STRATEGY CORPORATE HEAD OFFICE Division A FUNCTIONAL STRATEGIES Source: Robert M. Grant, Contemporary Strategy Analysis, Division B R&D Personnel Finance Production Marketing/Sales Basil Blackwell, 1991.