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1CHAPTER
McGraw-Hill/Irwin Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved .
What Is Strategy andWhy Is It Important?
Part 1 Strategy Analysis
1-2
LO 1-1 Define competitive advantage, sustainable competitive
advantage, competitive disadvantage, and competitive parity.
LO 1-2 Define strategy and explain its role in a firm’s quest for
competitive advantage.
LO 1-3 Explain the role of firm effects and industry effects in determiningfirm performance.
LO 1-4 Describe the role of corporate, business, and functional managersin strategy formulation and implementation.
LO 1-5 Outline how business models put strategy into action.
LO 1-6 Describe and assess the opportunities and challenges managers
face in the 21st century.
LO 1-7 Critically evaluate the role that different stakeholders play in thefirm’s quest for competitive advantage.
1-3
ChapterCase 1 The Premature Death of a Google Forerunner at Microsoft
• Google founded in 1998
Two graduate students at Stanford PageRank algorithm a clear improvement
Today, it is world’s leading online search/advertising firm
• Microsoft bought LinkExchange in 1998
Keywords product for search engines was shut down
• Microsoft considered buying Overture Servicesin 2003
Gates and Ballmer passed on the deal Yahoo buys Overture for its own search product
• Microsoft launches its own search in 2009
Bing now partnered with Yahoo
1-4
Microsoft and Google – Online Search
• What’s happening in our chapter opener?
Why might Microsoft have acted the way it did?
If they had not killed Keywords, would Microsoft havebeat Google to search and linked ads?
Why is Google so successful at online search whileYahoo struggled and partnered with Microsoft?
With hindsight, it appears that Microsoft made astrategic error. What could they have done differently?
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WHAT STRATEGY IS: GAINING AND SUSTAININGCOMPETITIVE ADVANTAGE
• What Is Competitive Advantage?Superior performance relative to competitors
Examples: Google, Duke Basketball, Pfizer’s Lipitor
• What Is Strategy?
Goal-directed actions to gain and sustain competitiveadvantage
NOT a zero-sum game Win – win scenarios – co-opetition
Requires trade-offs for strategic positioning JCPenney vs. Neiman Marcus
Southwest Airlines vs. Delta Song
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Strategy as a Theory of How to Compete
• Provides a manager's roadmap
Apple Newton flops in 1993
PalmPilot learned from Newton’s mistakes iPhone a huge success in 2009
Sam Walton’s assumptions about low prices & high
volume
Auto industry differences between U.S. & Japan
Palm Video
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LO 1-1 Define competitive advantage, sustainable competitive advantage,competitive disadvantage, and competitive parity.
LO 1-2 Define strategy and explain its role in a firm’s quest for competitive
advantage.LO 1-3 Explain the role of firm effects and industry effects in
determining firm performance.
LO 1-4 Describe the role of corporate, business, and functional
managers in strategy formulation and implementation.
LO 1-5 Outline how business models put strategy into action.
LO 1-6 Describe and assess the opportunities and challengesmanagers face in the 21st century.
LO 1-7 Critically evaluate the role that different stakeholders play in thefirm’s quest for competitive advantage.
1-8
1 –9
Performance Varies Across Industries
Reproduced from Ghemawat (2000), Strategy and the Business Landscape
(above-normal returns)
(15%)
(10%)
(5%)
0%
5%
10%
15%
20% Toiletries/Cosmetics
Steel
Pharmaceuticals Soft Drink
Tobacco Foo d Processing
Household Products Electrical Equipment
Financial Services Specialty Chemicals
Newspaper Bank
Integrated Petroleum Telecom Retail Store
Tire & Rubber Electric Utility- Central
Electric Utility- East
Medical Services Machinery Auto & Truck
Computer & Peripheral Paper & Forest Air Transport
EXHIBIT 1.1 Industry, Firm, and Other Effects Explaining Superior Firm Performance
Industry vs. Firm Effects in Performance Astute managers create superior performance
Making important trade-offs- Toyota’s lean manufacturing
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Performance Varies Within Industries
Discount General Merchandise Retail Industry
20.2%
17.1%
11.4%
7.1%
-1.2%
-5.5%
-0.1
-0.05
0
0.05
0.1
0.15
0.2
0.25
Wal-
Mart
Family
Dollar
Dollar
General
Consol'd
Stores
Fred's James-
way
R O A
1 9 8 8 - 1 9 9 2
Industry Average 9.4%
EXHIBIT 1.2 What Is Strategy?
Definition: Strategy is th e quest to gain and su stain
com pet i t ive advantage.
• It is the managers’ theories about how to gain andsustain competitive advantage.
• It is about being different from your rivals.
• It is about creating value while containing cost.
• It is about deciding what to do, and what not to do.
• It combines a set of activities to stake out a uniqueposition.
• It requires long-term commitments that are often noteasily reversible.
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What went wrong?
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What Strategy Is NOT….
• Raking in every pennythe firm can get
Profit is a
consequence of goodstrategy, it is NOT themain goal!
• Operationaleffectiveness
Enterprise Resource
Planning (ERP)Benchmarking
Six Sigma
“Necessary but not
sufficient” such as
Lean Manufacture
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Low Cost vs. DifferentiatedChoice of Strategy Does Not Imply Profitability
V
P
V
P
C
C
DifferentiatedP-C
Low CostP-C
=
Operational Effectiveness : Necessary but notsufficient for competitive advantage
V
P
C
V
P
C
Over time, firms with different operational effectiveness are able toaccumulate more resources
Strategy Across the Levels
• Where to Compete?
Should GE move more
aggressively into thehealth care industry?
• How to Compete?
Should GE jet engineshave better fuel efficiencythan Rolls Royce?
• How to Implement?
Should GE humanresources recruit morescience graduates?
• CORPORATESTRATEGY
• BUSINESSSTRATEGY
• FUNCTIONALSTRATEGY
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EXHIBIT 1.3 Strategy Formulation and Implementation Across Levels:Corporate, Business, and Functional Strategy
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BUSINESS MODELS:
• PUTTING STRATEGY INTO ACTION
Razor-blade model
Subscription model
• How is the firm going to make money tocontinue operations?
• What’s happening now between Microsoft &Google?
Business models in opposite directions
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EXHIBIT 1.4 Competing Business Models: Google vs. Microsoft
Microsoft
Software Apps
OnlineSearch
OperatingSystems
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STRATEGY IN THE 21ST CENTURY
• Accelerating Technological Change
84 years for half of U.S. families to own a car
28 years for half to own a TV
6 years for an MP3 player
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EXHIBIT 1.5 Accelerating Speed of Technological Change
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STRATEGY IN THE 21ST CENTURY
• Accelerating Technological Change
Why are we seeing this increased rate of change?
What are the strategic implications here?
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STRATEGY IN THE 21ST CENTURY
• A Truly Global World
BRIC countries have 40% of earth’s population
IBM has less than 30% of employees in the U.S.
“Bottom of the pyramid” business opportunities
Thomas Friedman-Flat World
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EXHIBIT 1.6 Geographic Sources of IBM Revenues, 2010
Is IBM still a “U.S. company” ?
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STRATEGY IN THE 21ST CENTURY
• Future Industries
HEALTH CARE
In the U.S., over 16% of GDP and stil l growing
GREEN ECONOMY
Potentially large growth in energy efficiency and technologies
WEB 2.0
Interactivity and using collective intelligence on the Internet
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EXHIBIT 1.7 Conceptual Depiction of Oil Prices and Predicted Trend
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STRATEGY HIGHLIGHT 1.1 Threadless: Leveraging Crowdsourcing
to Design Cool T-Shirts
• Online apparel company
Started in 2000 by 2 students with $1,000
“Prosumers” – a hybrid supplier/customer
Shirt designs are submitted by the community
Designs are voted on by the online community
– Only winning designs are produced & sold
Threadless Interview
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Threadless: Strategy Highlight 1.1
• What’s going on with this firm’s business model?
• How is it different than other clothes retailers?
• How is it the same?
• Other partners with Threadless?
Dell Computer – laptop exteriors
Thermos – lunch boxes
Griffin Technology – iPhone covers
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LO 1-1 Define competitive advantage, sustainable competitive advantage,competitive disadvantage, and competitive parity.
LO 1-2 Define strategy and explain its role in a firm’s quest for competitive
advantage.
LO 1-3 Explain the role of firm effects and industry effects in determiningfirm performance.
LO 1-4 Describe the role of corporate, business, and functional managersin strategy formulation and implementation.
LO 1-5 Outline how business models put strategy into action.
LO 1-6 Describe and assess the opportunities and challenges managersface in the 21st century.
LO 1-7 Critically evaluate the role that different stakeholders play inthe firm’s quest for competitive advantage.
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STAKEHOLDERS
• Successful business generates societal value
• Stakeholders – are affected by firm’s actions
Internal
External
• Vary by industry
Autos
Investment banking
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EXHIBIT 1.8 Internal and External Stakeholders
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THE AFI STRATEGY FRAMEWORK
• Analyze (A)
Getting Started; External & Internal Analysis
Chapters 1 thru 5
• Formulate (F)
Business and Corporate Strategy
Chapters 6 thru 10
• Implement (I)
Organizational Design & Corporate Governance
Chapters 11 thru 12
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Part 1 Strategy AnalysisExhibit 1.9
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CHAPTERCASE 1 Consider This…
• Microsoft has a new partner in the competitionfor a search engine with Google… FACEBOOK
• In fall 2010, Mark Zuckerberg announced theirsurprising decision to partner with the “really
scrappy…underdog”
• The partners are aiming to make “search more
social”
• “Our approach is about the speed of gettingthings done…not the speed of high volume of
results”
…Bing !!
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LO 1-1 Define competitive advantage, sustainable competitive advantage,
competitive disadvantage, and competitive par ity.
Competitive advantage is relat ive rather than absolute. To obtain a competitive advantage, a firm must either create more value
for customers while keeping its cost comparable to competitors, or itmust provide value equivalent to competitors but at a lower cost.
A firm dominating competitors over time has sustained competitiveadvantage.
A firm that continuously underperforms its rivals or the industry averagehas a competitive disadvantage.
Two or more firms that perform at the same level have competitiveparity.
Strategy is goal-directed actions in quest of competitive advantage.
Take-Away Concepts
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Take- Away Concepts (cont’d)
LO 1-2 Define strategy and explain its role in a firm’s request for
competitive advantage.
Strategy is the set of goal-directed actions a firm intends to take inits quest to gain and sustain competitive advantage.
An effective strategy requires that strategic trade-offs be recognizedand addressed—e.g., between value creation and the costs tocreate the value.
Managers’ strategic assumptions are an outflow of their theory of
how to compete. Successful strategy requires three integrativemanagement tasks—analysis, formulation, and implementation.
When managers align their assumptions closely with competitiverealities, they can create and implement successful strategies,resulting in value creation and superior firm performance.
When managers’ theories about how to gain and sustain competitiveadvantage do not reflect reality, their firm’s strategy will destroy
rather than create value, leading to inferior firm performance.
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Take- Away Concepts (cont’d) LO 1-3 Explain the role of firm effects and industry effects in determining
firm performance.
A firm’s performance is more closely related to its managers’ actions(firm effects) than to the external circumstances surrounding it(industry effects).
Firm and industry effects, however, are interdependent and thus bothrelevant in determining firm performance.
LO 1-4 Describe the role of corporate, business, and functional managers
in strategy formulation and implementation.
Corporate executives must provide answers to the question of where
to compete (in industries, markets, and geographies), and how to
create synergies among different business units.
General (or business) managers must answer the strategic questionof how to compete in order to achieve superior performance . Theymust manage and align all value chain activities for competitiveadvantage.
Functional managers are responsible for implementing businessstrategy within a single value chain activity.
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Take- Away Concepts (cont’d)
LO 1-5 Outline how business models put strategy into action.
A business model must translate strategy into effectively implementedtactics and initiatives that make money for the firm.
LO 1-6 Describe and assess the opportunities and challenges managers
face in the 21st century.
Ever-faster technological changes in a global marketplace.
Health care, green economy, & Web 2.0 are likely good growthopportunities.
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Take- Away Concepts (cont’d)
LO 1-7 Critically evaluate the role that different stakeholders play in the
firm’s quest for competitive advantage.
Stakeholders are individuals or groups that have a claim or interestin the performance and continued survival of the firm; they makespecific contributions for which they expect rewards in return.
Internal stakeholders include stockholders, employees (includingexecutives, managers, and workers), and board members.
External stakeholders include customers, suppliers, alliancepartners, creditors, unions, communities, and governments atvarious levels.
Some stakeholders are more powerful than others, and may extractsignificant rewards from a firm, so much so that any firm-level
competitive advantage may be negated.
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• AFI strategy framework
• Bottom of the pyramid
• Business model
• Competitive advantage
• Competitive disadvantage
• Competitive parity
• Co-opetition
• Crowdsourcing
• Externalities
• Firm effects
• Industry effects
• Stakeholders
• Strategic business unit(SBU)
• Strategic management
• Strategy
• Sustainable competitiveadvantage
1-42
