Business Strategy Bo1.2301.024/026

Spring, 2004

Joe Porac George Daly Professor in Business Leadership Department of Management and Organizations

7-21 Tisch Hall 212-998-0215 (Stern office)

908-608-1412 (home office and fax) jporac@stern.nyu.edu

Office Hours: Tues/Thur noon-3 PM

Teaching Fellow: Sun Kim (syk239@stern.nyu.edu)

Introduction This course is motivated by an interrelated set of three questions that are of great concern to most business organizations: “What determines the financial performance of a firm?” “Why do some firms succeed and others fail?” and “What, if anything, can a firm’s managers do about this?” It is the third question that will particularly occupy our time this semester since we will assume that managers influence the performance of firms by formulating and implementing strategies that vary in their performance implications. To guide us in our studies, we will use a definition of strategy proposed by the business historian Alfred Chandler in his well-known book, Strategy and Structure: Strategy is “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.” Within this very broad and generative definition of strategy, we will make three assumptions that will structure what we learn in the course:

1. Firms do well when they offer value that induces others (e.g., customers, suppliers, complementors, etc.) to want to participate in what the firm is doing. We’ll call this a firm’s “value proposition.” 2. Firms do well when they continue to offer value and continue to attract participants, even when other firms are making efforts to attract the same participants with value propositions of their own. We’ll call this a firm’s “sustainable competitive advantage.” 3. Firms do well when they can reinvent and/or expand their value proposition over time to attract even more participants. We’ll call this the firm’s “path of diversification.” We will assume, further, that “strategy” has something to do with 1-3 above, and our goal in the course is to find out what this something is and how to manage it. In the process, we will suggest that strategy consists of goals, plans to reach those goals, coherent and consistent patterns of resource allocation and acquisitions, and answers to identity questions such as “What business are we in?” and “What are we all about as a company?” It should become clear very quickly that strategy is not simply an exercise in financial analysis, nor a set of performance metrics, nor a consultant’s report, nor an abstract industry analysis. It is an embodied set of commitments that define the company and establishes an agenda for making money over time and for building coherence and consistency into what the company does. To keep track of where we are in studying the topic of strategy, we will follow a sequential “roadmap” that will allow us to build our knowledge gradually and cumulatively:

Creating Value Sustaining Value Diversifying Value

Market forcesthat influencevalue capture

Strategies The problem Generic

We will start off the semester asking the question of whether strategy really matters in controlling the performance of firms. What does the scientific evidence say? What does practice say? We will conclude that there is a great deal of variation in the performance of firms even in the same markets, and we will conclude that strategy is an important element in explaining these differences. We will then address the question of “value” and examine the abstract problem of creating a “value proposition” that encourages others to participate in the firm’s activities. But creating a value proposition is not

How much What is for building of growth and does strategy matter?

“value” and how can it

be created? Organizational

forces that influence

value capture

a competitiveadvantage

diversification strategies for diversification and managing

diversified firms

enough, it must be a value proposition that can be captured and sustained over time in the face of competitive pressures. So, the problems of value creation and value capture go hand-in-hand, and we will study both issues early in the semester. Next we will examine different strategies for building competitive advantage, and talk about the strengths and weaknesses of each. This will set the stage for our investigations into the problem of growth and diversification, and finally into our study of various strategies for diversifying and managing diversification profitably over time. Organization of the Course Our course consists of four different components that will work together to help us flesh out the concept of strategy and its role in the modern business organization: Readings: All reading materials for the course have been collected into two readers available at the bookstore. The first reader reproduces Chapters 2, 3, 4, and 5 from Ghemawat’s Strategy and the Business Landscape, six chapters from Czepiel’s Competitive Marketing Strategy, one chapter from Brandenburger and Nalebuff’s Coopetition, an article by Brandenburger from the Academy of Management Executive on Porter’s model, and an article by Brandenburger and Nalebuff about Intel originally published in the Harvard Business Review. The second reader consists of Chapters 2, 3 and 4 from Collis & Montgomery’s Corporate Strategy. The chapters and articles together provide a core of concepts and theories that will be important in helping us to understand the competitive positions of firms and the possibilities for crafting a competitive advantage. Lectures: To focus the reading material and elaborate various conceptual frameworks, a number of lectures have been prepared and are available at the course Blackboard site. These lectures provide a “backbone” of material around which we will organize our thinking about strategy. They are still works in progress, however, and may be added to and modified slightly as we move through the semester, depending on the issues that arise. Lectures are meant to be occasions for collective discussion of various theories and frameworks. Class participation will be actively solicited. Cases: We will use cases extensively in this class to illustrate how to apply conceptual frameworks and arguments to actual business situations. Some cases we will delve into together in an open class discussion. Others will be used only as examples and will be the basis for illustrating detailed points brought out in lectures. Most of the cases that we will be using are included in the first course reader. Other case materials are available at the course Blackboard site. One case (Siebel Systems) must be purchased at www.study.net. Still other case material will be obtained from company or industry websites. Case discussion is very important in this class. Additional material to help with case analysis is also available on the Stern Strategy website at: http://www.stern.nyu.edu/marketing/mbacore/corestrategy.html Assignments: Students in the class will be required to complete three graded assignments that will form the basis for final grades in the class. First, each student team

will be asked to work together to complete the Intel/AMD case (see study questions on the Intel case below). All team members will receive the same grade on the case. Second, each team will also work together over the semester to complete a strategic analysis of a company and industry chosen by the team (see below for project guidelines). Finally, all students will be responsible for individually completing a take home final exam that will cover the entire range of material in the semester. The final exam will be provided on the last day of class and will be due on the last day of the final exam period. These three assignments will be weighted as follows: Intel/AMD case: 20% of total grade Team project: 60% Final exam: 20% Class Attendance and Participation: Everyone is expected to attend all classes and to participate actively in class discussions. We will depend on everyone’s active involvement to make the class successful. Comments, questions, and case insights are all valuable and desired. Class participation will be considered when allocating final grades in borderline cases. If you need to miss class, please email the instructor ahead of time to let him know that you will be missing class and why. Remember, everyone’s learning experience in this class depends on everyone’s active participation. We are all interdependent and have an obligation to each other. Class Schedule The following table provides the schedule of classes, topics, readings, and due dates for assignments: Session/Date Topic Readings

1. 1/27 Course Introduction Semester Roadmap Course Mechanics

2. 1/29 How Much Does Strategy Matter? Strengths vs. Weaknesses Environments vs. Firms Intentions vs. Luck

Ghemawat, Chp1

3. 2/3 Strengths and Weaknesses, Weaknesses And Strengths

Review Southwest case, Read PE business plan, EasyJet case

4. 2/5 Value Creation Submit Industry and Firm Choices

CMS 3, Read patents for new mousetraps

5. 2/10 Value Capture From the Outside In: Five Forces and the Value Net

Ghemawat, Chp2 Brandenburger note on Porter

6. 2/12 Value Capture From the Outside In (cont)

Brandenburger Coopetition reading, Audubon Zoo and

web materials 7. 2/17 Value Capture From the Inside Out:

Resources, Capabilities, and Dynamic Capabilities

Collis & Montgomery, Chp. 2, Ghemawat, Chp 5

8. 2/19 Defining the Competitive Situation: Assessing External and Internal Combinations

Intel/AMD case, Brandenburger article on Intel, AMD web material

9. 2/24 Environmental Analysis Presentations Intel case write-ups returned

10. 2/26 Generic Strategies for Capturing Value: Cost vs. Quality Tradeoffs and Tradeons

Ghemawat, Chp 3

11. 3/2 Competing on Cost: A Closer Look

Wal-Mart case

12. 3/4 Competing on Quality and Brand: A Closer Look

Steinway & Sons case

13. 3/9 Competitive Dynamics and Industry Evolution

Ghemawat, Chp. 4, CMS 6, Cola Wars case

14. 3/11 Technological Change and Competing For The Future

CMS 5

3/16, 3/18 Spring Break 15. 3/23 Technological Change (cont’d) Browser Wars case

Kodak web materials 16. 3/25 Business Strategy Presentations 17. 3/30 Growth and the Problem of

Diversification Dell Horizons case

18. 4/1 Dilemmas and Possibilities for the Multi-business Firm

Collis & Montgomery Chps. 3, 4,

19. 4/6 Diversifying through Replication:

Subway web material, Noodles & Company web material, Easy Co. web material

20. 4/8 Diversifying through Alliances Siebel Systems (study.net)

21. 4/13 Diversifying through Internal Recombinations and Innovations

3M: Profile of an Innovative Company case

22. 4/15 Diversifying through Acquisitions Newell case, AMEX 23. 4/20 Diversifying through Mergers

Daimler Chrysler case and web material

24. 4/22 Firm Diversification Presentations 25. 4/27 The Dilemmas and Possibilities of the

Multi-business Firm Revisited Disney case

25. 4/29 Course Wrap Up

Case Materials and Orienting Questions The case and example materials that we will be using for various classes are listed below. Also listed are the orienting questions for each case that we will be focusing on in class discussions: February 3: Southwest: Review from MO class Herb Kelleher: http://www.mccombs.utexas.edu/news/pressreleases/kelleher_int03.aspPeople Express business plan: Blackboard People Express summary: http://www.olesen.com/aha/pe/pe.htmEasy Jet: Course reader Southwest, People, and Easy Jet all are (were) discount airlines that came to fruition post airline deregulation. Compare the strategies of Southwest and People. Why did Southwest succeed and People fail? What advice would you give to EasyJet as it proceeds to develop its business in Europe? February 5: Mousetrap patents: Blackboard Evaluate the different mousetrap designs for their attractiveness to potential buyers. Who would be the buyers for the different devices? What are the dimensions along which the devices vary in their “value propositions?” If you were an investor and were asked to provide funding for the commercialization of one of these patents, which would you choose, and why? February 12: Audubon Zoo: Blackboard www.auduboninstitute.org Evaluate the Audubon Zoo’s business environment from both the 5 Forces and Value Net perspective. Map out the different suppliers, customers, competitors, and complementors. What was the Zoo’s value proposition prior to Foreman taking charge? How has he changed the value proposition, and what has been his strategy for turning the Zoo around? February 19: Intel/AMD: Course reader, http://www.stern.nyu.edu/marketing/mbacore/corestrategy.html Use all of the material from our class so far to map out the competitive situations of Intel and AMD. How did Intel become so dominant? How attractive is the microprocessor business and what are the strengths and weaknesses of each company, and the threats and

opportunities each faces from their individual perspectives? Now focus on AMD. What are AMD’s prospects for the future? What strategies are open to it as it seeks to remain a viable producer in this market? NOTE: This case must be written up by each student team and submitted by email before class on Feb 19th. Please submit your team writeup as a set of Powerpoint slides – no more than 5 slides in total. You can use the notes function to expand on each slide if you need to, but no more than one paragraph per slide! You should also feel free to collect more material on Intel and AMD from web sources. March 2: Wal-Mart: Course reader http://www.stern.nyu.edu/marketing/mbacore/corestrategy.html A number of discounters emerged in the 1960’s (K-Mart, Target, etc.). What was different about Walton’s idea (if anything)? How has Wal-Mart competed and how has other retailers, particularly discounters, competed against Wal-Mart. Why did Wal-Mart develop logistical expertise? How would you characterize Wal-Mart’s relationships with its suppliers, including employees? What are the future prospects for the company as it seeks to continue to grow? March 4: Steinway & Sons: Blackboard www.steinway.com http://www.ptg.org/industry.htm How attractive is the piano market as a business, and who are Steinway’s key competitors? What is Steinway’s value proposition, and how has the company maintained it’s competitive advantage over time? What resources and capabilities have contributed to their success? What are the future prospects for the company, and what advice would you give to Steinway strategists for maintaining and/or building their business? March 9: Cola Wars: Course reader http://www.stern.nyu.edu/marketing/mbacore/corestrategy.html What was the guiding principle behind Coke’s early moves – in the early to mid twentieth century – to develop its business? What strategy did Pepsi use in its early days to gain ground against Coke? In the Cola Wars since the Pepsi Challenge, who have been the winners and who have been the losers? In the U.S., Pepsi was able to make inroads against Coke. Why is this proving harder for Pepsi in international markets?

March 23: Browser Wars: Blackboard Kodak: www.kodak.com Compare Microsoft and Kodak’s position as incumbents facing possible displacement of their business by a technological challenger. How long did it take each company to perceive the competitive threat and why? Once they understood the threat, compare the strategies of the two companies to regain their strategic footing and “capture the future.” Have there been differences in these strategies? What are they, and why do you think they exist? What about the challengers? What advice can you provide regarding how to attack an incumbent’s position? March 30: Dell Horizons: Course reader What has been the basis for Dell’s value proposition over the years? What resources and capabilities have contributed to their ability to capture this value and build a stronghold in the PC industry? As they seek to grow, what are their strengths and weaknesses as a company, and what are their key threats and opportunities in the marketplace? Provide advice to Dell and his top managers regarding attractive diversification paths. How can they leverage their capabilities in profitable ways and continue to grow the business? April 6: Subway: www.subway.comNoodles: www.noodles.comEasy Co.: www.easy.com Compare the diversification paths that Subway, Noodles, and Easy Co. have pursued in expanding their businesses. What is being replicated in each company, and how have the firms managed their replication strategies? Why do you think these differences exist? What are the prospects for future growth for each company? April 8: Siebel Systems: available for purchase at www.study.net under our course name. Why has Siebel Systems used alliances to grow their business? What role has alliances played in the companies competitive strategy? How have they managed their alliances, and what are the strengths and weaknesses of this approach? Would you expect Siebel’s reliance on alliances to increase, decrease, or stay the same as it expands into new markets and products? Why?

April 13: 3 M: Profile of Innovative Company: Course reader How does 3M ensure that knowledge is shared among its different businesses? How does 3M encourage the creation of new knowledge? How can we characterize the different eras at 3M in terms of centralization vs. decentralization? What are the pros and cons of each form of organization? April 15: Newell: Course reader AMEX: Blackboard How does Newell make money selling staple products to powerful Wal-Mart? How has it managed to be a successful acquirer when many companies have failed at this? What threats does Newell face at the time of the case? How do the Calphalon and Rubbermain acquisitions fit with or change Newell’s historical strategy? Compare Newell’s strategy of acquisition with Amex’s during the Robinson era. What lessons can be drawn from this comparison for understanding the benefits and drawbacks of using acquisitions to diversify? April 20: Daimler Chrysler: Course reader What was each company’s value profile at the time of the merger? What does the case say are the requirements for competing successfully in the car business today? What is the logic behind these requirements? Do you think they are, in fact, necessary? What problems could reasonably have been foreseen with the Daimler-Chrysler merger? What can we learn about the realization of “synergy” from mergers? What could Daimler and Chrysler have done differently? April 29: Disney: Course reader http://www.stern.nyu.edu/marketing/mbacore/corestrategy.html Eisner was able to double sales and quintuple net income within three years of arriving at Disney. How did he do it? What was Eisner’s longer-term strategy? How did it differ from Disney’s historical strategy? Course Project For the course-long project, each team should select an organization which is of interest to team members. Some tips on making a good choice: You could choose a well-known organization—but, perhaps, you think the conventional wisdom on it doesn’t tell the whole story. Or, you might find a ‘hidden gem’—a less well-known organization that is following a very interesting strategy. Some element of puzzle or surprise can definitely help make the project more exciting. You might decide that you want to look at the

organization going forward, and make some recommendations. But it is equally okay if you want to look at the history of the organization, and use the ideas of the course to explain its successes or failures to date. Most important, take your time to select a subject that is substantial enough to support a course-long effort. And, in choosing an organization, please make sure that you are able to obtain adequate information for a thorough and in depth analysis of it’s industry, competition, current strategies, and future prospects. Project Description The goal of the project is a strategic analysis of the chosen organization. The analysis should cover the following points: 1. Description of the business landscape in which the organization operates. How attractive, in general, is the organization’s current business environment, and who are it’s key competitors, suppliers, complementors, and so forth? Here you will want to use the 5 Forces and Value Net models to map out the structure of the markets in which the firm does business and to evaluate the attractiveness of those markets. 2. Assessment of the organization’s competitive position in that landscape. What is the firm’s value proposition, and how has it been able to appropriate its share of value? What are the organization’s strengths and weaknesses, and what unique opportunities and threats does it face? Here you will want to use course material on value creation and value capture. 3. Delineation of offensive and defensive strategies for the organization. How will the organization protect itself as the market evolves, and how can it be aggressive in competing proactively against competitors? Here you will want to use course material on the dynamics of industries and the possible strategies of incumbents and challengers. 4. Delineation of possible diversification paths for the organization and an overall summary of the project. What are the different alternatives available to the company for expanding beyond its currents products and/or markets. What are the pros and cons of each strategy, and how should the most attractive options be implemented and managed? Here you will want to use the course material on diversification, replication, alliances, acquisitions, and mergers. For each part of the project, you should use the course concepts as precisely as you can. But please don’t use them mechanically. Make the concepts serve your analysis, not vice versa. Also, you don’t have to use every idea from every part of the course. Indeed, this is unlikely to make for a successful project. Use your judgment as to which concepts are relevant to your question (and which are not). Project Deliverables All deliverables must be in Powerpoint. (You may use the notes function to expand on some of your slides—but at most one short paragraph per slide.)

The deliverables for the project are as follows: 1. One slide describing the organization to be studied by the team, and also the issues the team expects its strategic analysis will illuminate—to be emailed by class on 2/5 2. Six slides covering parts 1 and 2 of the project—to be emailed by class on 2/24 3. Six slides covering part 3 of the project—to be emailed by class on 3/25 4. Four slides covering part 4 of the project—to be emailed by class on 4/22 Project Presentations: There are three class sessions devoted to project presentations. On 2/24, approx. four teams will present their slides on parts 1 and 2. On 3/25, approx four teams will present their slides on part 3. On 4/22, approx. four teams will present their slides on part 4. Each team will present once, and I will notify teams shortly before the date they are to present. Project Grades: Each slide set for the project will be evaluated separately and each will count for 20% of the final grade in the course (for a total of 60% of the total). Strategy-Related Web Links Other useful sites related to business strategy are listed below. General strategy-related resources: Strategic management self-study PowerPoint slides: http://www.csuchico.edu/mgmt/strategy/ SOOKOO! (Strategy Organized Online with Key Ordered Optimization) – The Yahoo! of strategic management: http://www.sookoo.com/ Strategic Management Club Online's guide to strategy-related web sites: http://www.strategyclub.com/links_from_the_paper.htm Free Management Library: http://www.mapnp.org/library/topics.htm i) Strategic planning: http://www.mapnp.org/library/plan_dec/str_plan/str_plan.htm ii) Guidelines for organizational design: http://www.mapnp.org/library/org_thry/design.htm How to research an industry: http://www.virtualpet.com/industry/howto/search.htm Industry-specific portals & home pages: http://www.virtualpet.com/industry/mfg/mfg.htm A guide to strategic planning created for church organizations: http://www.apeo.org/guide/

Business Owner's Toolkit: http://www.toolkit.cch.com/ “Life Beyond Yahoo!” business research page: http://servercc.oakton.edu/~wittman/find/finance.htm Mike Leiblein's strategy resource page: http://www.cob.ohio-state.edu/~leiblein/strat-res.htm Wall Street Research Net: http://www.wsrn.com/ (A useful tool for researching companies.) Careers in strategy: WetFeet’s consulting pages: i) Career overview: http://www.wetfeet.com/asp/careerprofiles_overview.asp?careerpk=9 ii) Job requirements: http://www.wetfeet.com/asp/careerprofiles_req.asp?careerpk=9 iii) Job outlook: http://www.wetfeet.com/asp/careerprofiles_outlook.asp?careerpk=9 iv) Career tracks: http://www.wetfeet.com/asp/careerprofiles_track.asp?careerpk=9 v) Compensation: http://www.wetfeet.com/asp/careerprofiles_comp.asp?careerpk=9 vi) “Ace Your Case” insider’s guide to handling case interviews in consulting: http://www.wetfeet.com/asp/insiderguide_detail.asp?InsiderGuide_pk=4 Ohio State University’s “careers in strategy” pages: i) Jobs & required skills: http://fisher.osu.edu/fin/jobs/spjobs.htm ii) Print resources: http://fisher.osu.edu/fin/jobs/spjobs2.htm iii) Web resources: http://fisher.osu.edu/fin/jobs/spjobs3.htm iv) Top firms: http://fisher.osu.edu/fin/jobs/spjobs4.htm Careers in consulting: http://jobsearch.about.com/library/weekly/aa071198.htm?terms=consulting Management consulting industry overview: http://consulting.about.com/cs/consultants/index.htm HBS guide to careers in management consulting: http://www.hbsp.harvard.edu/hbsp/prod_detail.asp?3235 Strategy-related periodicals: Harvard Business Review: http://www.hbsp.harvard.edu/products/hbr/index.html The Economist: http://www.economist.com FastCompany: http://www.fastcompany.com/homepage/ strategy+business: http://www.strategy-business.com/

Professional associations & research in strategy: Strategic Planning Society: http://www.sps.org.uk Society for Competitive Intelligence Professionals: http://www.scip.org/ Strategic Management Society: http://www.smsweb.org/ Academy of Management's Business Policy & Strategy Division: http://aom.pace.edu/bps/bps.html Strategic Management Research Bibliographies: http://aom.pace.edu/bps/biblio.html Strategic Management Journal: http://www.interscience.wiley.com/jpages/0143-2095/