Strategy - Chapter 1: Strategy

What Is Strategy and Why Is It important?

In general terms, strategy is the planned and realized set of actions a firm takes to achieve its goals. Strategy governs the ubiquitous quest for superior performance. Goals directed to gain and sustain competitive advantage. The firm that possesses competitive advantage provides superior value to customers at a competitive price or acceptable value at a lower price. Profitability and market share are the consequences of superior value creation. Direct competitors cooperate occasionally to create win-win scenarios. When competitors cooperate with one another to achieve strategic objectives, we call this co-petition. Strategic management is an integrative management field that combines analysis, formulation, and implementation in the quest for competitive advantage. Strategy as a theory of how to compete provides managers with a roadmap to navigate the competitive territory. The more accurate the map, the better strategic decisions managers can make. The strategic management process, therefore, is a never ending cycle of analysis, formulation, implementation and feedback. Strategy is not IT strategy, operations strategy, brand strategy. All these elements are part of a firm's functional strategy to support its business model. Competitive benchmarking is not strategy, best in class practices such as Six Sigma and ERP all fall under the umbrella of tools for operational effectiveness. Operational effectiveness, marketing skills, and other functional expertise, along with best practices, contribute to a unique strategic position, but by themselves they are not a substitute for strategy.

Competitive Advantage A firm that formulates and implements a strategy that leads to superior performance relative to other competitors in the same industry or the industry average has a competitive advantage. A firm that is able to outperform its competitors or the industry average over a prolonged period of time has a sustainable competitive advantage. If a firm underperforms its rivals or the industry average, it has a competitive disadvantage. Should two or more firms perform at the same level, they have competitive parity. If other competitors can easily imitate a firm's source of competitive advantage, then any edge the firm gains is short-lived. But if the advantage is difficult to understand or imitate, the firm can sustain it over time. One example of this is patents, which often protect certain products from direct imitation for a period.

Industry vs Firm Effects Managers' actions tend to be more important in determining firm performance than the forces exerted upon by its external environment.

Thus, firm effects (the results of managers' actions to influence firm performance) tend to have more impact than industry effects (the results attributed to the choice of industry in which to compete).

Definition of Strategy Strategy is the quest to gain and sustain competitive advantage. It is the managers' theories about how to gain and sustain competitive advantage. It is about being different from your rivals. It is about creating value while containing cost. It is about deciding what to do and what not to do. It combines a set of activities to stake out a unique position. It requires long term commitments that are often not easily reversible.

Formulating Strategy Across Levels: Corporate, Business and Functional Managers Strategy formulation concerns the choice of strategy in terms of where and how to compete. Corporate strategy involves decisions made at the highest level of the firm about where to compete. Corporate executives need to decide in which industries, markets and geographies their company should compete, as well as how they can create synergies across business units that may be different. A strategic business unit is a standalone division of a larger conglomerate, with its own profit and loss responsibility. Within each SBU are various business functions such as accounting, finance, human resources, product development.etc. Each functional manager is responsible for decisions and actions within a single functional area that aid in the implementation of the business level strategy.

Business Models: Putting Strategy Into Action A business model is an organizational plan that details the firm's competitive tactics and initiatives; in short how the firm intends to make money. If a firm fails to translate a strategy into a profitable business model, the firm will cease to exist. To come up with a business model, the firm first transforms its theory of how to compete into a blueprint of actions and initiatives that support the overarching strategy. Secondly, the organization implements this blueprint through structures, processes, culture and procedures.

Strategy in the 21st Century Drastic rate of technological change over the last 100 years Factors explaining rapid technological diffusion and adoption include initial innovations such as the car, airplane, telephone and the use of electricity which provided the necessary infrastructure for newer innovations. Another reason is the emergence of new business models that make innovations more accessible.

A Truly Global World Advances in information technology and transportation have led to the "death of distance" Due to falling trade and investment barriers, companies are now part of a global economy made up of several key markets - BRIC, EU. BRIC countries occupy more than 40% of the world's population and a quarter of the world's landmass. Bottom of the pyramid of the global economy - the largest but poorest socioeconomic group of the world's population - can yield significant business opportunities.

Future Industries Healthcare - where it represents 16% of the GDP in the US and is continuously growing. Green Economy - Vast majority of today's economic activity around the globe is based on clean energy. Potentially large growth in energy efficiency and technologies. Reduce externalities - side effects of production and consumption that are not reflected in the price of a product. WEB 2.0 - Interactivity and using collective intelligence on the internet.

Stakeholders Stakeholders are individuals or groups who can affect or are affected by the actions of a firm. Some stakeholders can exert a powerful influence on firms. In some instances, firms are able to create a competitive advantage but fail to capture it because of the action of stakeholders.

The AFI Strategy Framework The AFI strategy framework is a model that links three interdependent strategic management tasks - analyze, formulate, and implement - that together, help firms conceive of and implement a strategy that can improve performance and result in competitive advantage. Strategy analysis (A): o The strategic management process: What are our vision, mission, and values? What is our process for making strategy? o External Analysis & Internal Analysis o Firm Performance Strategy formulation (F) o Business Strategy: How should we compete? o Corporate Strategy: Where should we compete? o Global Strategy: Where and how should we compete around the world? Strategy implementation o Organizational Design - How should we organize and put the formulated strategy into practice? o Corporate governance, business ethics and strategic leadership