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What is Strategy

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• At the height of its power:• 407000 employees• $6 Billion profits

• Then hit problems:• 140000 employees lost jobs• $5 Billion loss• Dividends fell from $1,21 to $0,54

Case: IBM

2

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• Formed 1911• Made scales, coffee grinders, cheese slicers and clocks• 1924 changed name to IBM to focus on computing

technologies• Led the world until the 1970s in computer technology

Background

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• System/360 mainframes led the world but required 5 new factories

• Control problems led to an increase in bureaucracy: between 1963-1966, personnel increased by 130%, sales only 97%

• Meetings and consensus created stagnation in the organisation

Trouble ahead

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• New CEO, Louis Gerstner in 1993• Reduced bureaucracy• Performance based pay for executives• Brought in outsiders• Moved into IT service sector

Today?

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1984 Profits: $242 Million

Theme Park Operations: 77 percent of profits

Consumer Products: 22 percent of profits

Filmed Entertainment: 1 percent of profits

Walt Disney Company

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Hired Michael Eisner - 1984

1. Increased admission prices at theme parks1984 - $186 m 1989 - $787 m

2. Focused on movie studios (character development)1984 - $2.42 m 1994 - $845 m

3. Diversified into television (ABC), hotels, retail stores,sport team, cruise line, publishing, consumerproducts, licensing, etc. (Huey & McGowan, 1995)

Walt Disney Company

Market Cap: 1984 = $2 billion 1994 = $28 billion

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Definition of Strategy

Strategy: A firm’s theory about how to gaincompetitive advantages

Eisner’s theory may have been:

People will pay a premium price for extraordinaryentertainment. We have the necessary resources tocreate extraordinary entertainment. Therefore, let’sredeploy our resources in a different way and offersomething extraordinary to people.

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Mission Objectives

ExternalAnalysis

InternalAnalysis

StrategicChoice

StrategyImplementation

CompetitiveAdvantage

The Strategic Management Process

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The Strategic Management Process

Objectives

ExternalAnalysis

InternalAnalysis

StrategicChoice

StrategyImplementation

CompetitiveAdvantage

Mission

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• At X, we strive to lead in the creation, development and manufacture of the industry's most advanced information technologies, including computer systems, software, networking systems, storage devices and microelectronics.And our worldwide network of X solutions and services professionals translates these advanced technologies into business value for our customers.

Mission Statements

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• We are a global family with a proud heritage, passionately committed to providing personal mobility for people around the world. We anticipate consumer needs and deliver outstanding products and services that improve people’s lives.

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The Strategic Management Process

Objectives:

• specific, measurable targets

• the things a firm needs to ‘do’ to achieveits mission

• should influence other elements in the strategicmanagement process

Example: IBM’s mission & objectives

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• “At IBM, we strive to lead in the invention, development and manufacture of the industry's most advanced information technologies, including computer systems, software, storage systems and microelectronics.

• We translate these advanced technologies into value for our customers through our professional solutions, services and consulting businesses worldwide."

Current IBM Mission Statement

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The Strategic Management Process

External and Internal Analysis

External Analysis

Systematic Examinationof the Environment

Internal Analysis

• interest rates

• demographics

• social trends

• technology

• human resources(knowledge)

• manufacturingabilities

• technology

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The Strategic Management Process

Strategic Choice

ExternalAnalysis

InternalAnalysis

StrategicChoice

BusinessLevel

CorporateLevel

• positioninga business

• which businesses?

Example: Apple

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The Strategic Management Process

Strategy Implementation

• how strategies are carried out

• who will do what

• organizational structure and control

• who reports to whom

• how does the firm hire, promote, pay, etc.

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A Strategy Is Only As Good As Its Implementation

Strategy Implementation

The Strategic Management Process

• every strategic choice has strategy implementationimplications

• strategy implementation is just as important asstrategy formulation

Example: Napoleon’s invasion of Russia

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The Strategic Management Process

Competitive Advantage

Definition: the ability to create more economic valuethan competitors

• all other elements of the strategic managementprocess are aimed at achieving competitive advantage

Mission Objectives

ExternalAnalysis

InternalAnalysis

StrategicChoice

StrategyImplementation

CompetitiveAdvantage

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Competitive Advantage

The Ability to Create More EconomicValue Than Competitors

• there must be something different about a firm’soffering vis-à-vis competitors’ offerings

• if all firms’ strategies were the same, no firmwould have a competitive advantage

• competitive advantage is the result of doingsomething different and/or better than competitors

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Competitive Advantage

Two Types of Difference

1) Preference for the firm’s output

2) Cost advantage vis-à-vis competitors

• people choose the firm’s output over others’

• people are willing to pay a premium

• lower costs of production/distribution

Example: Mercedes

Example: RyanAir

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Competitive Advantage

ExternalAnalysis

InternalAnalysis

StrategicChoice

StrategyImplementation

CompetitiveAdvantage

• identify and exploit differences that may leadto competitive advantage

Example: Apple’s iPod

The Strategic Management Process

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Q

P

D

MR

D

ATCMC

Q

P

(D=MR=Price)

Imperfect Competition Perfect Competition

Competitive Advantage

ATCMC

Competitive AdvantageEconomic Models

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Competitive Advantage

Temporary & Sustainable

• competition limits the duration of competitiveadvantage in most cases

• profits attract competition

• competitive advantage typically results in high profits

Therefore,

• most competitive advantage is temporary

• competitors imitate the advantage or offersomething better

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Competitive Advantage

Temporary & Sustainable

Some competitive advantages are sustainable if:

• competitors are unable to imitate the sourceof advantage

• no one conceives of a better offering

Of course,

• in time, even sustainable competitive advantagemay be lost

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Competitive Advantage

Competitive Parity

• the firm’s offerings are ‘average’

• people do not have a preference for the firm’s offering

• the firm does not have a cost advantage over others

• some things that may lead to competitive parity maystill be critical to success (e.g., telephones)

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Competitive Advantage

Competitive Disadvantage

• people may have an aversion to the firm’s offering

• the firm may have a cost disadvantage

• a firm may have outdated technology/equipment

• a firm may have a negative reputation

Example: McDonalds

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Competitive Advantage

Measuring Competitive Advantage

Superior Economic Performance Is Viewed asEvidence of Competitive Advantage

• it is rather easy to see the evidence ofcompetitive advantage

• measuring the source of the advantage per seis typically impossible

• it’s difficult to ‘measure’ technology

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Two Classes of Measures:

1) Accounting Measures

2) Economic Measures

Competitive Advantage

Measuring Competitive Advantage

• ROA, Profit Margin, ROE, etc. that exceed industry averages

• earning a return in excess of the costof capital

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Competitive Advantage

Competitive Advantage

Disadvantage

Parity

Advantage

Below Normal

Normal

Above Normal

Economic Returns

• exceeding expectations

• meeting expectations

• failing expectations

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Competitive Advantage & The Strategic Management Process

Emergent vs. Intended Strategies

• the strategic management process leads managersto intended strategies

However,

• conditions often change or new informationbecomes available

• managers respond and adopt emergent strategies

Example: Honda Motorcycles

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The Strategic Management Process

Summary

Firms could achieve competitive parity and survive

• they would face a flat demand curve

• their cost structure would be the industry average

• they would need to adapt their strategy overtime just to survive

• they would fail if they didn’t adapt their strategy

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The Strategic Management Process

Summary

This course is not about mere survival, it is aboutthriving—achieving competitive advantage

• the strategic management process helps managersachieve competitive advantage

• competitive advantage depends on differences

• strategy is about discovering and exploiting these differences

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Q

P

D

MR

D

ATCMC

Q

P

(D=MR=Price)

ATCMC

The Strategic Management Process

Thriving! Surviving

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• Describe the Chinese macro environment in 1995.• What are the main characteristics of the Chinese colour

television market?• What changes were taking place in the Korean market?

How was this affecting Korean firms?• Describe Samsung’s strategy in the US. Why did they

take this strategy?• What is Samsung’s competitive advantage?• What are the entry options open to Samsung? What are

the main issues?• What would you recommend to Samsung?

Samsung China