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Agenda: January 10, 2003
Introduction
Syllabus
Class Overview / Intro to Strategy
What is Strategy? (Porter article)
Current Events
NotecardsName
Phone Number
E-mail Address
Major & Class Standing
Career or Personal Interest(s)
Work Experience (industry, length of time)
Business Strategy and Policy
Business Strategy and Policy
BA 495 Section 06
Friday 1:00-4:50
Room BA 130
What is strategy?
It’s the coherent development of a business model, where you first select an industry, and then decide how to compete within the industry.It coordinates all the functional areas into one main planIn this context, the objective of strategy is to create and sustain competitive advantage for the firm.
Ideally, You should have a good “fit” between your internal
capabilities and the external requirements from the environment.
Your strategy should take advantage of your strengths.
Sustained Competitive Advantage
Above-Average ReturnsReturns in excess of what an investor expects to earn from other investments with similar risk
Occurs when a firm develops a strategy that competitors are not simultaneously implementing
Provides benefits which current and potential competitors are unable to duplicate
Strategic CompetitivenessAchieved when a firm successfully formulates and implements a value-creating strategy
What is this course all about?
Strategy Relates A Business To Itself and Its Environment
Mktg. OpsStrategy
Finance
Sales H.R.
Competitive Environment
GovernmentRegulation
Technology
IndustryEnvironment
National/Int’l Economies
OtherCompetitors
RelatedIndustries
Model of Strategic Management
Analysis/Scanning
External Analysis (Chapter 3)
Internal Analysis (Chapter 4)
Strategy Implementation
Organizing (Chapter 8)
Staffing
(Chapter 9)
Strategy Formulation
Business Level (Chapter 5)
Corporate Level (Chapter 6)
Functional Level (Chapter 7)
Evaluation & Control
Metrics (Chapter 10)
Challenge of Strategic Management
Only 16 of the 100 largest U.S. companies at the start of the 20th century are still identifiable today!
In a recent year, 44,367 businesses filed for bankruptcy and many more U.S. businesses failed
Competitive success is transient...unless care is taken to preserve competitive position
An Example: Gap Inc.
Founded in 1969, Gap Inc. is a global specialty retailer selling apparel, personal care and other accessories for men, women, and children
For the 26 weeks ended 7/29/00, net sales rose 20% to $5.8 billion. Net income rose 6% to $419.4 million and three different “brands,” including:
Gap
Banana Republic
Old Navy
Employs over 110,000 people worldwide and operates 2,900 stores in the United States, Canada, France, Germany, Japan and the United Kingdom
What’s the strategy behind this business? How do you explain its success? How do you explain its recent stumble?
Challenges Facing Gap Inc.Overall Environment?
How is the apparel retailing business evolving, both in terms of its customers, competitors, etc.?
Specific Challenges?What sorts of challenges do these changes present to Gap’s current strategy?
What to do?What options does Gap Inc. have for dealing with these challenges?
How to implement?What strategy should Gap Inc. employ to maintain its competitive advantage, and how does the organization need to change to implement this strategy?
What is Strategy?(Michael Porter)
What makes good strategy? (Porter’s Point)
Operation Effectiveness = Good strategy ?NO !!
Outperform your rivals in similar activities.
Hypercompetition
JIT, TQM, Outsourcing (imitable??)
Present
Time
Horizon
Long-term
Porter’s Article: Operational Effectiveness vs. Strategy
Operational Effectiveness Performing similar activities better than rivals perform them (charge higher price or reduce cost)Possibility of diffusion
Strategic PositioningPerforming different activities from rivals or performing similar activities in different waysUnique activities
Total Quality Management
Emphasis on organizational commitment to Customer
Continuous improvement of every process
Data-driven, problem-solving approach
Empower employees and teams
Productivity Frontierhigh
low
low
high
Productivity Frontier
Relative Cost Position
Nonpri
ce b
uyer
valu
e d
eliv
ere
d
Appraising Strategy and Achieving Competitive Advantage
So, a strategy is a plan or pattern of choices which results in a competitive advantage
How to judge the level of competitive advantage?
Interest Rate (NPV>0)
Industry average level
Closest competitor
Trade-Offs
Gains in one area can be achieved only at the expense of another area.
Trade-offs come about due to inconsistencies in image or reputation
What type of trade-offs can we come up with? How do you determine which decision is best for the organization?
Strategic Positioning
Variety-based positioningBased on product or services offering rather than customer segmentation (Jiffy-lube)
Needs-based positioningTarget customer strategy (Bessemer Trust vs. Citibank)
Access-based positioningBased on set activities needed to reach market (Carmike)
Appraising Strategy and Achieving Competitive Advantage
So, a strategy is about combining activities that fit each other
What kinds of strategies are likely to achieve competitive advantage?
One aspect of a good strategy is that it is “coherent.”
The First Rule of Strategy
A Good Strategy Is “Coherent.”Functional pieces of strategy support the whole
Southwest Airlines, American, & Continental Airlines
Oper.Strateg
y
Finance
Acctg. H.R.
Mktg.
Coherence
The idea that that the firm coordinates its activities such that they complement and reinforce each other.
1st Order Fit – Simple consistency between functional activities
2nd Order Fit – Activities are reinforcing 3rd Order Fit – Optimization of effort
Poor performance in one area will bring down performance in others.
Coherence and Sustainable Competitive Advantage
Strategic positions built on a coherent systems of activities are far more sustainable than those built on individual activities.
Fit orCoherence
Competitive Advantage
Sustainability
+
+
Discussion Questions
How does only flying 737s lower Southwest’s costs?
Why Can’t Continental Imitate Southwest?
What does Southwest miss? In other words, how is Southwest limited by its own strategy?
How does only flying 737s lower Southwest’s costs?
Lower maintenance costs: mechanics can better specialize, less inventory on hand
Lower training costs—pilots only have to learn one set of controls,
Quicker turnaround times—Southwest gets one additional “flight” per day from each aircraft, lowering capital costs.
Less scheduling problems Volume purchasing from Boeing
The 737s guide other strategies too!
Southwest only flies direct, short flights.– No lunches (less cleanup costs too!)– Expansion is tied to existing locations– More opportunity for “return flights”
Southwest avoids hubs if possible.
Why Can’t Continental Imitate Southwest?
Inconsistent image or reputation Frequent flyer program
Trade-offs among different activities Hubs too busy for quick turn around Lose focus
Internal Coordination and Control Commission for travel agents
Strategic Coherence -The Logic of How The Business Fits Together
Southwest AirlinesLow Price
Short Routes
No Frills
Point-to-Point
One Aircraft - Boeing 737
High Aircraft per Route
No Meals
Flexible/ Lower Staffing
Price-sensitive customers
Continental AirlinesPremium Priced
Short, Long, & Int’l
Variety
Hub & Spoke
Multiple Aircraft
Low Aircraft per Route
Meals & Service
Higher Staffing (Unions)
Comfort-sensitive customers
Why does Southwest Succeed?This is Porter’s point
Southwest succeeds because it does not try to become United Airlines.
o It will never be a “luxury leader”; Southwest leaves that to others.
Southwest succeeds because its strategy is coherent and thus hard to imitate.
What does Southwest miss?
Doesn’t shop around for aircraft—Boeing has a captive customer
No international expansion (except maybe Canada and Mexico)
Not as much first class business—mostly tourists and cheap companies.
Can’t hop into “hot markets” unless they’re close by. Expansion comes slowly.
Growth Trap
What does Porter term the growth trap or “growth imperative”?
How does a company go about reconnecting with its core strategy? (hint: see pg. 76)
What are the “hot features” that Porter discusses?
Role of Leadership
How can the leaders of an organization instill discipline?
How can they communicate strategy?
How can they communicate and drive changes in core strategies?
In Summary,
Improving operational effectiveness does not necessarily mean it represents the strategy.The strategic agenda involves trade-offs.Strategies need constant attention; its enemies are distraction and compromise.Coherence is critical to sustained competitive advantage.A strategy must be adequately communicated and reinforced.
Current Events
Approximately 10 minutes
Determine relevant news item/company
Examine current strategic elements
Evaluate performance and direction
Facilitate class discussion
Summarize
Cases & Industries
Wal-mart Stores, Inc. Retail IndustryRCA Records Entertainment Ind.American Airlines Transportation Ind.Airborne Express Logistics/Overnight Delivery
Verizon Comm Stock History
Company Profile and Outlook
Revenue EPS
Next Time: Concept of Strategy
Current Events
Read Chapter 1: Basics of Strategic Management
Read Chapter 2: Corporate Governance
Team Project Defined
Assign Case #1: Wal-mart Stores, Inc.
WEBSITE: www.sba.pdx.edu/faculty/stephens/ss.html