Chapter 1 - What Is Strategy

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Chapter 1
What Is Strategy?
Copyright © 2017 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document
may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
2
The AFI Strategy Framework
Copyright © 2017 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied,
scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
3
Strategic Management
an integrative management field that

combines analysis, formulation, and
implementation in the quest for
competitive advantage
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Strategy: a set of goal-directed actions a firm takes to gain

and sustain superior performance relative to competitors
To achieve – New ventures: for financial and human capital
– Existing companies: for profitable growth
superior – Charities: for donations
performance, – Universities: for the best students and
companies professors
– Sports teams: championships
compete for – Celebrities: media attention
resources:
5
Elements of a Good Strategy
A set of
Guiding coherent
Diagnosis of
policy to actions to
the implement
address the
competitive the firm’s
competitive guiding policy
challenge
challenge
Analysis Formulation Implementation

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Elements of a Good Strategy:

Analysis
– Accomplished through strategy analysis of the
firm’s internal and external environments
Example: Apple
• Competitive challenge for Steve Jobs: 2001 –
Recognized that with less than 5% market
share, Apple could not compete with
Microsoft, Intel, and Dell in the PC industry
• Thus, Jobs needed to create the next big thing
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Formulation
– Accomplished through strategy formulation,
resulting in the firm’s corporate, business, and
functional strategies
Example: Apple
• Guiding Policy – Business Model Innovation
• Seamless integration across music/photo/mobile devices

• iPods, iTunes, iPhones, iMacs, iWatch disrupted the
existing PC market
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Implementation
– Accomplished through strategy implementation
Example: Apple
• Effectively Implemented Overarching Approach
• Simple Rules:
• Focused shifted into competitive focus to mobile
devices – PCs at hand
• Disrupted Industry Status Quo:
➢ Business model innovation through product innovations
executed at planned intervals
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Competitive
Advantage
• To assess competitive advantage:

– Compare firm performance to a
Competitive Advantage: benchmark
• Performance of other firms in the same
a firm that achieves superior industry
performance relative to other • An industry average
competitors in the same industry or
the industry average
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Examples
In digital advertising: Google

Google has a competitive advantage
over Facebook, Twitter, and Yahoo
In smartphones: Apple
Apple has achieved a competitive
advantage over Samsung, Microsoft,
and BlackBerry
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Competitive Advantage: Key Points
Competitive Advantage Sustainable Competitive Advantage

– Superior performance relative to – Outperforming competitors or the
other competitors in the same industry average over a prolonged
industry or the industry average period of time
Competitive Disadvantage Competitive Parity

– Underperformance relative to other – Performance of two or more firms at
competitors in the same industry or the same level
the industry average
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Strategy Is About
Creating Superior Value
• The rewards of superior value creation and capture are
profitability and market share.
– Sam Walton (Walmart): offered lower prices.
– Steve Jobs (Apple): “put a ding in the universe.”
– Mark Zuckerberg (Facebook): made the world open and connected.
– Larry Page and Sergey Brin (Google): made information accessible.
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Strategic Positioning
• Stake out a unique position within an industry to provide value to

customers, while controlling costs.
• The greater the difference between value creation and cost:

– the greater the firm’s economic contribution.
– the more likely it will gain competitive advantage.
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Strategic Positioning
Requires Trade-offs
• Managers must make conscious trade-offs.
– Enables competitive advantage
• In the retail industry, for example:

– Walmart: “everyday low prices”
– Nordstrom’s: professional sales
people in a luxury setting
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Unique Positioning
• The key to successful strategy: combine activities for a unique position in an industry
• Competitive advantage has to come from:
– performing different activities or
– performing the same activities differently than rivals
• Example: Walmart’s strategic activities strengthen its position as cost leader

– Big stores in rural locations
– Working with local farmers
– Efficient logistics
– Low base wages
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Our strategy is to win” or

“We will be No. #1”
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Managers must know

whether they are making
progress in addressing the
challenge.
18
Operational effectiveness,
competitive
benchmarking, or other
tactical tools
19
What Strategy Is Not
1. Grandiose statements
– Statements of desire
– Ex: “Our strategy is to win” or “We will be No. #1”
2. A failure to face a competitive challenge
– Managers must know whether they are making progress in addressing the
challenge.
3. Operational effectiveness, competitive benchmarking, or other tactical tools
– These support competitive strategy, but are not sufficient to sustain it.
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Where does Strategy Depend on?

Industry Vs. Firm Effects In Determining Firm Performance
Firm effects: firm performance is
attributed to managerial actions.
More important factor in determining firm
performance than external environment
forces
Industry effects: describe the
underlying economic structure of the
industry.
Determined by elements common to A firm’s strategy can explain up to 55% of
all industries its performance.
Examples:
Entry and exit barriers
Number and size of companies
Types of products and services offered
About 20% of a firm’s profitability
depends on the industry it’s in.
Exhibit 1.1
21
answers 3 questions:
22
answers 3 questions:
23
Strategic Management Where do we

answers 3 questions: want to be?
24
Strategic Management Where do we

answers 3 questions: want to be?
How do we
get there?
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AFI Framework
✓ Analysis
✓ Formulation
✓ Implementation
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Stakeholders and Competitive

Advantage
27
Value Creation for Society
• Companies with good strategy

generate value for society.
– Firms compete in their own self-interest.
– Firms obeying the law and acting
ethically
• Companies with a good strategy:
– Provide products or services to
consumers at an affordable price
– Make a profit
– Benefit both parties
– Make society better
28
Value Creation for Society
• Successful companies create value

for the economy:
– Education, public safety, and health
care
• Superior performance allows a firm
to reinvest some of its profits for
growth
– More opportunities for employment
• Example: Google
– Employs 55,000 people
– People rely on Google for information
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Strategic Failure
is Expensive
• HP has not been able to address the competitive challenges effectively:

– Stakeholders suffered
– Shareholder value was destroyed
– Had to lay off thousands of employees
– Customers no longer received innovative products
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In the past, most people assumed that all swans

were white.
32
33
When they first encountered swans

that were black, they were surprised.
34
Today, the metaphor of a

black swan describes the
high impact of a highly
improbable event.
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Black Swan Events • Trust between corporations and

society have deteriorated because of
black swans .
– Accounting Scandals: Enron
– Real Estate Bubble: 2008 financial crisis
• Managerial actions can affect the well-
being of people around the globe.
– Most black swan events result from
executive actions (or inactions.)
36
American energy company based in Houston, founded in 1985
Since 1992 developed a staff of executives that, by the
use of accounting loopholes, special purpose entities,
and poor financial reporting, were able to hide billions
of dollars in debt from failed deals and projects
Company's stock price, which achieved a high of

US$90.75 per share in mid-2000, plummeted to less
than $1 by the end of November 2001
On December 2, 2001, Enron filed for bankruptcy.

Enron's $63.4 billion in assets made it the largest
corporate bankruptcy in U.S. history at the time
Wikipedia
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Stakeholders
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Stakeholders
Exhibit 1.2
Internal and External Stakeholders in an
Exchange Relationship with the Firm
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Stakeholder Strategy
• Managing stakeholders • Exemplifies how

in order to gain and managers can act to
sustain competitive improve firm
advantage performance
– Firms analyze and – Enhances competitive
manage stakeholders advantage
– Determine how – Enhances continued
external and internal survival
stakeholders interact • Example: Target
– Stakeholders can Corporation
create and trade value
There is an important relationship between Stakeholders

& Competitive Advantage. Think of VW case
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VW surpasses Toyota as world's
largest automaker in first half of 2015
In 18 September 2015, the

“dieselgate” was exposed
Volkswagen announced plans to spend

US$7.3 billion, later raised to US$18.32
billion, on rectifying the emissions
issues, and planned to refit the affected
vehicles as part of a recall campaign
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✓ On 21 September 2015 the first day of trading

after the EPA's Notice of Violation to Volkswagen
became public, share prices of Volkswagen AG
fell 20% on the Frankfurt Stock Exchange.
✓ On 22 September, the stock fell another 12%. On
23 September, the stock quickly fell 10.5%,
dropping below €100 to a record 4-year low
before regaining some lost ground.
✓ A year later VW stock was down by 30%.
✓ Share prices of other German automakers were

also affected, with BMW down 4.9% and Daimler
down 5.8%.
✓ Qatar, one of the biggest VW shareholders with a

17% stake in the company, lost nearly $5 billion
as the company stock value Total Cost is Estimated as anything
between $22 – $87 Billion
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Effective Stakeholder Management
1. Cooperation and information

availability
2. Increased trust lowers costs
3. Greater organizational adaptability
and flexibility
4. More predictable and stable returns
– Reduction of risk exposure
5. Stronger reputation
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“World’s Most Admired Companies”
• Most managers care about

public perception.
• Fortune magazine publishes

the “World’s Most Admired
Companies” annually:
44
Stakeholder Impact Analysis
• Stakeholder impact analysis:

– A decision tool
– Managers recognize, prioritize, and
address stakeholder needs
• Managers must note three stakeholder

attributes:
– Power
– Legitimacy
– Urgency
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5 Steps of Stakeholder Impact Analysis

Focus on stakeholders that the firm has, or potentially can have
Identify: powerful internal and external stakeholders and their needs
Specify and assess the interests and claims of stakeholders.

Use the power, legitimacy, and urgency criteria.
Opportunities and threats are two sides of the same coin.

Managers should try to transform threats into opportunities.
Corporate Social Responsibility

(CSR):
A framework to recognize and
address economic, legal, social, Managers decide the appropriate course of action.
and philanthropic expectations The attributes of power, legitimacy, and urgency help to prioritize legitimate claims.
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• On April 20, 2010, an explosion occurred.

– At a drilling rig off the Louisiana coastline
– Killed 11 workers
• The oil spill continued for over three months.
• It released an estimated 5 million barrels of
crude oil into the Gulf of Mexico.
– The largest environmental disaster in U.S. history
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The cleanup cost was $14 billion.

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• Tony Hayward, BP’s CEO at the time,

was fired.
• Experts said BP’s problems were
systemic:
– Management repeatedly failed to put a
safety culture in place.
51
BP faced thousands of claims by many small business owners.
– Mainly in the tourism and seafood industries
Collectively, the small business owners became powerful BP stakeholders.

52
BP paid out over $25

billion to settle their
claims.
53
• Total cost for this incident: $60 billion

• The Environmental Protection Agency (EPA) banned BP
from any new contracts with the U.S. government.
• This ban puts BP at a major competitive disadvantage.
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The AFI
Strategy
Framework
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• Outlines actions that managers take to gain and sustain competitive
advantage
• AFI helps managers craft and execute a strategy that enhances the chances
of achieving superior performance.
– Analyze (A)
– Formulate (F)
– Implement (I)
57
❑ Competitive Advantage
❑ Strategic Positioning
❑ AFI Framework
❑ Stakeholders Impact Analysis
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1

The AFI Strategy Framework

an integrative management field that

Strategy: a set of goal-directed actions a firm takes to gain

Elements of a Good Strategy

Analysis Formulation Implementation

Elements of a Good Strategy:

• Thus, Jobs needed to create the next big thing

Elements of a Good Strategy:

• Seamless integration across music/photo/mobile devices

Elements of a Good Strategy:

• To assess competitive advantage:

In digital advertising: Google

Competitive Advantage: Key Points

Competitive Advantage Sustainable Competitive Advantage

Competitive Disadvantage Competitive Parity

• Stake out a unique position within an industry to provide value to

• The greater the difference between value creation and cost:

• In the retail industry, for example:

• Example: Walmart’s strategic activities strengthen its position as cost leader

Our strategy is to win” or

Managers must know

What Strategy Is Not

Where does Strategy Depend on?

Strategic Management Where do we

Strategic Management Where do we

Stakeholders and Competitive

Value Creation for Society

• Companies with good strategy

Value Creation for Society

• Successful companies create value

• HP has not been able to address the competitive challenges effectively:

In the past, most people assumed that all swans

When they first encountered swans

Today, the metaphor of a

Black Swan Events • Trust between corporations and

Company's stock price, which achieved a high of

On December 2, 2001, Enron filed for bankruptcy.

• Managing stakeholders • Exemplifies how

There is an important relationship between Stakeholders

In 18 September 2015, the

Volkswagen announced plans to spend

✓ On 21 September 2015 the first day of trading

✓ Share prices of other German automakers were

✓ Qatar, one of the biggest VW shareholders with a

Effective Stakeholder Management

1. Cooperation and information

“World’s Most Admired Companies”

• Most managers care about

• Fortune magazine publishes

Stakeholder Impact Analysis

• Stakeholder impact analysis:

• Managers must note three stakeholder

5 Steps of Stakeholder Impact Analysis

Specify and assess the interests and claims of stakeholders.

Opportunities and threats are two sides of the same coin.

Corporate Social Responsibility

• On April 20, 2010, an explosion occurred.

The cleanup cost was $14 billion.