Strategy

The word strategy is derived from the Greek word stratgos;

stratus (meaning army) and ago (meaning leading/moving).

Strategy
Strategy is an action that managers take to attain one or more of the organizations goals. Strategy can also be defined as A general direction set for the company and its various components to achieve a desired state in the future. Strategy results from the detailed strategic planning process.

Strategy V/S Tactic

Strategy is the overall plan for deploying resources to establish a favorable position. Tactic is a scheme for a specific maneuver.

Features of Strategy
Strategy is Significant because it is not possible to foresee the future. Without a perfect foresight, the firms must be ready to deal with the uncertain events which constitute the business environment. Strategy deals with long term developments rather than routine operations, i.e. it deals with probability of innovations or new products, new methods of productions, or new markets to be developed in future. Strategy is created to take into account the probable behavior of customers and competitors. Strategies dealing with employees will predict the employee behavior.

Strategy
Strategy is a well defined roadmap of an organization. It defines the overall mission, vision and direction of an organization. The objective of a strategy is to maximize an organizations strengths and to minimize the strengths of the competitors. Strategy, in short, bridges the gap between where we are and where we want to be.

Characteristics of strategic decisions

Important Involve a significant commitment of resources Not easily reversible

Basic Framework

The firm Goals & Values Resources & Capabilities Structures & Systems Strategy

External Environment

Competitors
Customers Suppliers

etc

Definitions
Strategic Management Process
The full set of commitments, decisions, and actions required for a firm to create value and earn aboveaverage returns

Value Creation
What is achieved when a firm successfully formulates and implements a strategy that other companies are unable to duplicate or find too costly to imitate.

Definitions

Average Returns
Returns that are equal to those an investor expects to earn from other investments with a similar amount of risk

Above-Average Returns
Returns that are in excess of what an investor expects to earn from other investments with a similar amount of risk

Strategic Management Process

The strategic management process means defining the organizations strategy. It is also defined as the process by which managers make a choice of a set of strategies for the organization that will enable it to achieve better performance. Strategic management is a continuous process that appraises the business and industries in which the organization is involved; appraises its competitors; and fixes goals to meet all the present and future competitors and then reassesses each strategy.

Strategic Management Process

Strategic Management Process

Environmental Scanning Environmental scanning refers to a process of collecting, scrutinizing and providing information for strategic purposes. It helps in analyzing the internal and external factors influencing an organization. After executing the environmental analysis process, management should evaluate it on a continuous basis and strive to improve it.

Strategic Management Process

Strategy Formulation Strategy formulation is the process of deciding best course of action for accomplishing organizational objectives and hence achieving organizational purpose. After conducting environment scanning, managers formulate corporate, business and functional strategies.

Strategic Management Process

Strategy Implementation Strategy implementation implies making the strategy work as intended or putting the organizations chosen strategy into action. Strategy implementation includes designing the organizations structure, distributing resources, developing decision making process, and managing human resources.

Strategic Management Process

Strategy Evaluation Strategy evaluation is the final step of strategy management process. The key strategy evaluation activities are:
appraising internal and external factors that are the root of present strategies, measuring performance, and taking remedial / corrective actions.

Evaluation makes sure that the organizational strategy as well as its implementation meets the organizational objectives.

Definitions
Risk
An investors uncertainty about the economic gains or losses that will result from a particular investment

Competitive Landscape
Dynamics of strategic maneuvering among global and innovative combatants Price-quality positioning, new know-how, first mover Hypercompetitive environments Fundamental nature of competition is changing Protect or invade established product or geographic markets

Competitive Landscape
Emergence of global economy Goods, services, people, skills, and ideas move freely across geographic borders Spread of economic innovations around the world Hypercompetitive environments Fundamental nature of competition is changing Political and cultural adjustments are required

Competitive Landscape
Emergence of global economy Rapid technological change

Increasing rate of technological change and diffusion The information age

Hypercompetitive environments Fundamental nature of competition is changing

Increasing knowledge intensity

Strategic Flexibility

A set of capabilities used to respond to various demands and opportunities existing in a dynamic and uncertain competitive environment It involves coping with uncertainty and the accompanying risks

Strategic Flexibility
Organizational slack

Strategic reorientation

Strategic Flexibility flexibility

Capacity to learn

I/O Model of Above-Average Returns

1. External Environments

General
Global

Industry Environment

Strategy dictated by the external environment of the firm (what opportunities exist in these environments?) Firm develops internal skills required by external environment (what can the firm do about the opportunities?)

Competitor Environment
Technological

Environment

Industrial Organization (I/O) Model of Above-Average Returns explains the external environments dominant influence on a firms strategic actions. The model specifies that the industry in which a company chooses to compete has a stronger influence on performance than do the choices managers make inside the organizations

I/O Model: McDonalds and Starbucks

Respectively, in both cases the CEOs Ray Crock and Howard Schultz were examining the industry in which they worked. Crock was a sales rep for a firm that built malted milkshake machines. Schultz was a sales rep for a company that made home espresso machine accessories. Both noticed that there was a customer that was purchasing a large volume of these machines. They made trips to the locations of these stores and noticed that each was in an emerging industry that had highgrowth potential and higher-than-average profit margins. McDonalds is in fast-food and drive-thru restaurants and Starbucks is in specialty coffee retail.

Four Assumptions of the I/O Model

The external environment is assumed to possess pressures and constraints that determine the strategies that would result in above-average returns Most firms competing within a particular industry or within a certain segment of it are assumed to control similar strategically relevant resources and to pursue similar strategies in light of those resources

 Four Assumptions of the I/O Model

Both Crock and Schultz identified the strategy that allowed their companies to achieve high profits: McDonalds through the assembly line of their burgers and Starbucks with product marketing that created ambiance and consistency, a value perception that allowed them to charge high premium for their coffee.

Four Assumptions of the I/O Model

Resources used to implement strategies are highly mobile across firms Organizational decision makers are assumed to be rational and committed to acting in the firms best interests, as shown by their profitmaximizing behaviors

 Four Assumptions of the I/O Model

Both McDonalds and Starbucks then spent time and capital to acquire and develop the skills needed to implement the business strategy. Crock became a business partner of the McDonald brothers and sold franchise agreements for them. Schultz took a position in the marketing department of Starbucks. Each later purchased the firm and used what they had learned to rapidly expand the company. Crock was able to use McDonalds quality, consistency, rapid assembly system, and drive-thru concepts to continue to realize high profits. Schultz was able to use the Starbucks image, ambiance concept, and marketing strengths to rapidly expand. One interesting note: Initially, Schultz started a Seattle coffeehouse chain (Il Giorande) that competed with Starbucks. His marketing manager was so adamant that Starbucks was a better concept capable of going global that Schultz sold his original coffeehouse chain and purchased Starbucks.

I/O Model of Above-Average Returns

Industrial Organization Model
The External Environment Study the external environment, especially the industry environment economies of scale barriers to market entry diversification product differentiation degree of concentration of firms in the industry

I/O Model of Above-Average Returns

Industrial Organization Model
The External Environment An Attractive Industry Locate an attractive industry with a high potential for aboveaverage returns Attractive industry: one whose structural characteristics suggest above-average returns

I/O Model of Above-Average Returns

Industrial Organization Model
The External Environment An Attractive Industry Identify the strategy called for by the attractive industry to earn aboveaverage returns Strategy formulation: selection of a strategy linked with above-average returns in a particular industry

Strategy Formulation

I/O Model of Above-Average Returns

Industrial Organization Model
The External Environment An Attractive Industry Develop or acquire assets and skills needed to implement the strategy Assets and skills: those assets and skills required to implement a chosen strategy

Strategy Formulation
Assets and Skills

I/O Model of Above-Average Returns

Industrial Organization Model
The External Environment An Attractive Industry Use the firms strengths (its developed or acquired assets and skills) to implement the strategy Strategy implementation: select strategic actions linked with effective implementation of the chosen strategy

Strategy Formulation
Assets and Skills Strategy Implementation

I/O Model of Above-Average Returns

Industrial Organization Model
The External Environment An Attractive Industry

Strategy Formulation
Assets and Skills Strategy Implementation Superior Returns
Superior returns: earning of above-average returns

Resource-based Model of Above Average Returns

1. Firms Resources Strategy dictated by the firms unique resources and capabilities

Find an environment in which to exploit these assets (where are the best opportunities?)

Resource-based model: Patents and Inventions

The resource-based view (RBV) of the firm is hedged on two axiomatic assumptions. First, resources are distributed heterogeneously across firms, and Second, these resources cannot be transferred between firms without cost. These axioms lend themselves to two additional tenets (cf., Barney, 1991):
(a) Resources that simultaneously enhance a firms market effectiveness (valuable) and are not widely dispersed (rare) can produce competitive advantage; and (b) when such resources are concurrently expensive to imitate (inimitable) and costly to substitute (nonsubstitutable), the competitive advantage is sustainable. Thus, value and rarity are each necessary before inimitability and non-substitutability might yield a sustainable competitive advantage (Priem & Butler, 2001).

Resource-based Model of Above Average Returns

Resource-based Model
Resources Identify the firms resources-- strengths and weaknesses compared with competitors Resources: inputs into a firms production process

Resource-based model: Patents and Inventions (cont.)

Despite its face validity and rapid diffusion throughout the management literature, there have only been limited empirical tests of RBVs tenets (cf., Priem & Butler, 2001). To echo Miller and Shamsie (1996, p. 519), the concept of resources remains an amorphous one that is rarely operationally defined or tested for its performance implications in different competitive environments. Many managers use RBVs terms with little specificity or attention to causal relationships. Researchers have identified several types of valuable and rare resources that could generate rents. Some examples include information technology (Powell, 1997), strategic planning (Powell, 1992), organizational alignment (Powell, 1992a), human resources management (Lado & Wilson, 1994; Wright & McMahan, 1992), trust (Barney & Hansen, 1994), organizational culture (Oliver, 1997), administrative skills (Powell, 1993), expertise of top management (Castanias & Helfat, 1991), and even Guanxi complex networks (Tsang, 1998).

Resource-based Model of Above Average Returns

Resource-based Model
Resources Capability Determine the firms capabilities--what it can do better than its competitors Capability: capacity of an integrated set of resources to integratively perform a task or activity

Resource-based model: Patents and Inventions

The degree to which RBV is likely to help managers depends on the extent to which it can be used to achieve competitive advantage. Hence, recently, Markman and his colleagues have attempted to clarify three basic questions: (1) Can a single resource be simultaneously valuable, rare, inimitable, and nonsubstitutable? (2) Can an inimitable and non-substitutable resource be measured? And (3) To what extent is an inimitable and non-substitutable resource associated with competitive advantage? Using five-year data from 85 large, publicly traded pharmaceutical companies, Markman and his colleagues advance the view that a single resource-patented invention could qualify as simultaneously valuable, rare, hard to imitate, and difficult to substitute. In other words, the answer to the first question is yes; some patents are valuable, rare, inimitable, and non-substitutable resources. The answers to the second and third questions are yes as well. That is, controlling for assets, sales, and investment in R&D, they found that a patents quality and scope are significantly related to competitive advantage as captured by new products and, to some extent, to profitability.

Resource-based Model of Above Average Returns

Resource-based Model
Resources Capability Determine the potential of the firms resources and capabilities in terms of a competitive advantage Competitive advantage: ability of a firm to outperform its rivals

Competitive Advantage

Resource-based Model of Above Average Returns

Resource-based Model
Resources Capability Locate an attractive industry An attractive industry: an industry with opportunities that can be exploited by the firms resources and capabilities

Competitive Advantage
An Attractive Industry

Resource-based Model of Above Average Returns

Resource-based Model
Resources Capability Select a strategy that best allows the firm to utilize its resources and capabilities relative to opportunities in the external environment Strategy formulation and implementation: strategic actions taken to earn above average returns

Competitive Advantage
An Attractive Industry Strategy Form/Impl

Resource-based Model of Above Average Returns

Resource-based Model
Resources Capability

Competitive Advantage
An Attractive Industry Strategy Form/Impl Superior Returns Superior returns: earning of above-average returns

Strategic Intent & Mission

Strategic Intent

Winning competitive battles by leveraging the firms resources, capabilities, and core competencies

Strategic Mission

An application of strategic intent in terms of products to be offered and markets to be served

Emergent and Deliberate Strategies

Intended Strategy

Deliberate Strategy

Realized Strategy

Unrealized Strategy

Emergent Strategy

From Strategy Formation in an Adhocracy by Henry Mintzberg and Alexandra McHugh, Administrative Science Quarterly, Vol. 30, No. 2, June 1985. Reprinted by permission of Administrative Science Quarterly.

Strategic Management Process for Intended Strategies

Missions and Goals

External Analysis

Strategic Choice

Internal Analysis

INTENDED STRATEGY

Organizing for Implementation

Strategic Management Process for Emergent Strategies

External Analysis

Missions and Goals

Internal Analysis

Strategic Choice Does It Fit?

EMERGENT STRATEGY

Organizational Grassroots

The Firm and Its Stakeholders

Stakeholders
The firm who mustare maintain Groups affected by a performance at an adequate firms performance and who level in order to retain the have claims on its wealth participation of key stakeholders

The Firm and Its Stakeholders

Stakeholders
Capital Market Stakeholders
Shareholders Major suppliers of capital Banks Private lenders Venture capitalists

The Firm and Its Stakeholders

Stakeholders
Capital Market Stakeholders
Primary customers Suppliers Host communities Unions

Product Market Stakeholders

The Firm and Its Stakeholders

Stakeholders
Capital Market Stakeholders

Product Market Stakeholders Employees Managers Non-managers

Organizational Stakeholders

Values
Johnson & Johnsons credo sets its responsibilities to:
1. J&J product users. 2. J&J employees. 3. Communities in which J&J employees live and work. 4. J&J stockholders.

Johnson & Johnson Credo*

First Responsibility Is to Those Who Use J&J Products Next Come Its Employees Next, the Communities in Which the Employees Live and Work Its Final Responsibility Is to Its Stockholders

Levels of Strategy