Strategy Formulation & Implementation

MGMT.6910-061

Week 1 Slides
Introductory comments

Review Syllabus, text book, class notes, etc.

Review Week 1 Chat slides and attend the
chat sessions

Discuss Group Project and assignments

Introduce What is Strategy?

Course Description

The Course walks you through the process of strategic

analysis, development of alternate courses of actions,
strategic decision making, implementation and
management of strategic plans.

It offers students detailed discussion on how

contemporary firms develop their business strategies in
an ever changing competitive environment.

The Course places a special emphasis on the integrative

aspects of strategy implementation.

It will cover major concepts and numerous real life

examples to elaborate these concepts.
Discussion Board Posts - Weekly
Assigned question and comment on other Posts

Chat Sessions
Strongly suggest you attend these sessions
Discuss Group Project, DB Posts and Assignments

Email
Must use Blackboard email to communicate with me
DO NOT USE UML EMAIL
Week 1 Notes
-Examples (Apple, Microsoft, Maytag, Xerox, Kodak, FedEx
and UPS)
-Analyzing financial performance
-Understanding of strategy and execution
-Strategy Planning Process and Issues
- Too much structured, tops-down, rigid
- Lacks organizational involvement, thus creates execution issues
- Too quantitative and analytical
- Does not recognize/accept fast changing World
- Lacks employee empowerment
- Focuses on Market share Vs Opportunity share
-Importance of Strategy Execution (organizational Alignment,
staffing, communication, performance evaluation)
-Breakdown in the process experience
-Business Basics and Starting Points
-What is Strategy?
Microsoft Corporation
Yearly Income Statements
(In millions, except earnings per share)
FY00 1 FY01 1 FY02 3 FY03 3 FY04 2 FY05 2 FY06 2 FY07 2 FY08 2 FY09 FY10 FY11 Avg Growth
Revenue $ 22,956 $ 25,296 $ 28,365 $ 32,187 $ 36,835 $ 39,788 $ 44,282 $ 51,122 $ 60,420 $ 58,437 $ 62,484 $ 69,943
Year-to-year growth% 10% 12% 13% 14% 8% 11% 15% 18% -3% 7% 12% 11%
Operating expenses:
Cost of revenue 3,002 3,455 5,699 6,059 6,596 6,031 7,650 10,693 11,598 12,155 12,395 15,577
4
Research and development 3,772 4,379 6,299 6,595 7,735 6,097 6,584 7,121 8,164 9,010 8,714 9,043
Sales and marketing 4,126 4,885 6,252 7,562 8,121 8,548 9,910 11,541 13,260 12,879 13,214 13,940
General and administrative 5 1,050 857 1,843 2,426 5,275 4,536 3,758 3,329 5,127 4,030 4,063 4,222
Other expenses 0 0 0 0 0 0 0 0 0 0 0 0
Total operating expenses 11,950 13,576 20,093 22,642 27,727 25,212 27,902 32,684 38,149 38,074 38,386 42,782
Net Income 9,421 7,346 5,355 7,531 8,168 12,254 12,599 14,065 17,681 14,569 18,760 23,150
Year-to-year growth% -22.02% -27.11% 40.63% 8.46% 50.02% 2.82% 11.64% 25.71% -17.60% 28.77% 23.40% 11%
% of Revenue
Cost of Revenue 13.08% 13.66% 20.09% 18.82% 17.91% 15.16% 17.28% 20.92% 19.20% 20.80% 19.84% 22.27%
Gross Profit 86.92% 86.34% 79.91% 81.18% 82.09% 84.84% 82.72% 79.08% 80.80% 79.20% 80.16% 77.73%
R&D 16.43% 17.31% 22.21% 20.49% 21.00% 15.32% 14.87% 13.93% 13.51% 15.42% 13.95% 12.93%
SG&A 22.55% 22.70% 28.54% 31.03% 36.37% 32.88% 30.87% 29.09% 30.43% 28.94% 27.65% 25.97%
Net Income 41.04% 29.04% 18.88% 23.40% 22.17% 30.80% 28.45% 27.51% 29.26% 24.93% 30.02% 33.10%

60%
50%
40%
30%
20% Revenue Year-to-year
AAGR
10%
growth% Revenue: 11%
Net Income Year-to-year
0% growth%
Net Income 11%
1 2 3 4 5 6 7 8 9 10 11 12
-10%
-20%
-30%
-40%
Microsoft Revenue Sources:

Year Ended June 30 2012 2011 2010

Revenue
Windows & Windows Live $ 18,373 $ 19,033 $ 19,491
Division
Server and Tools 18,686 16,680 15,109
Online Services Division 2,867 2,607 2,294
Microsoft Business 23,991 22,514 19,256
Division
Entertainment and 9,593 8,915 6,079
Devices Division
Unallocated and other 213 194 255
Total $ 73,723 $ 69,943 $ 62,484
Operating Income (Loss)
Windows & Windows Live $ 11,460 $ 12,211 $ 12,895
Division
Server and Tools 7,431 6,290 5,381
Online Services Division -8,121 -2,657 -2,408
Microsoft Business 15,719 14,657 11,849
Division
Entertainment and 364 1,257 517
Devices Division
Corporate-level activity -5,090 -4,597 -4,136
Total $ 21,763 $ 27,161 $ 24,098
 Microsoft and Strategy Issue

Hi Star Question
marks
Attractiveness

Servers and Tools

Business Division Entertainment/
Devices
Market

Cash Cows Dogs

Windows
Online svcs

Lo
Strong Weak

Market Position
 Apple, Inc.
Apple, Inc.
FY2000 FY2001 FY2002 FY2003 FY2004 FY2005 FY2006 FY2007 FY2008 FY2009 FY2010 FY2011 Avg Growth
Sales $7,983 $5,363 $5,742 $6,207 $8,279 $13,931 $19,315 $24,006 $32,479 $42,905 $65,225 $108,249
Growth Y-to -Y -32.82% 7.07% 8.10% 33.38% 68.27% 38.65% 24.29% 35.30% 32.10% 52.02% 65.96% 30.21%
Cost of Sales $5,733 $4,026 $4,021 $4,387 $5,871 $9,738 $13,525 $15,568 $20,925 $25,683 $39,541 64,431
Gross Profit $2,250 $1,337 $1,721 $1,820 $2,409 $4,193 $5,790 $8,438 $11,554 $17,222 $25,684 $43,818
SG&&A $1,546 $1,568 $1,557 $1,683 $1,910 $2,393 $3,145 $3,745 $4,870 $4,149 $5,517 $7,599
R&D Expense $380 $441 $447 $471 $489 $534 $712 $782 $1,109 $1,333 $1,782 $2,429
Net Income $786 -$25 $65 $69 $276 $1,335 $1,989 $3,496 $4,834 $8,235 $14,013 $25,922
Growth Y-to -Y -103.18% -360.00% 6.15% 300.00% 383.70% 48.99% 75.77% 38.27% 70.36% 70.16% 84.99% 55.93%

% of Sales
Cost of Sales 71.8% 75.1% 70.0% 70.7% 70.9% 69.9% 70.0% 64.9% 64.4% 59.9% 60.6% 59.5%
Gross Profit 28.2% 24.9% 30.0% 29.3% 29.1% 30.1% 30.0% 35.1% 35.6% 40.1% 39.4% 40.5%
SG&&A 19.4% 29.2% 27.1% 27.1% 23.1% 17.2% 16.3% 15.6% 15.0% 9.7% 8.5% 7.0%
R&D Expense 4.8% 8.2% 7.8% 7.6% 5.9% 3.8% 3.7% 3.3% 3.4% 3.1% 2.7% 2.2%
Net Income 9.8% -0.5% 1.1% 1.1% 3.3% 9.6% 10.3% 14.6% 14.9% 19.2% 21.5% 23.9%
Apple, Inc. - Major Revenue Sources
($ in M illions) 2007 2008 2009 2010 2011
Source 1 - Mac $10,314 $14,276 $13,859 $17,479 $21,783
Source 2 - iPod & related products $10,801 $12,493 $12,127 $13,222 $13,767
Source 3 - iPhone & related products $123 $1,844 $13,033 $25,179 $47,057
Source 4 - iPad & related products $0 $0 $0 $4,958 $20,358
Source 5 - Software, Service, Other $2,768 $3,866 $3,886 $4,387 $5,284
Total $24,006 $32,479 $42,905 $65,225 $108,249

Apple, Inc. - US/International

Revenue Split ($ in M illions) 2007 2008 2009 2010 2011
US revenue $14,128 $18,469 $22,325 $28,633 $41,812
International Revenue $9,878 $14,010 $20,580 $36,592 $66,437
Total $24,006 $32,479 $42,905 $65,225 $108,249
 Apple and Strategy Issue

Hi Star Question
iPad marks
Attractiveness

iPhone Wearable
devices?
Market

Cash Cows Dogs

Macs
Sft/svc
iPod

Lo
Strong Weak

Market Position
12
 A Tale of Two Titans

Microsoft

Apple
Strategy and Performance

- Financial performance can provide some useful starting

points to understand strategy and its execution
- Need to go much deeper in financial ratios
- Ratios like profitability ratios can help in understanding
management and operational effectiveness
- E.g. ROIC, ROE, ROA, GM, OM, NM
- But it is ONLY a starting point
- Other aspects must be considered
- External environment (industry, competition, macro
trends, )
- Internal environment (resources, processes, )
The beginning
-value propositions
- Segments - Differentiating factors
- Channels
Who is being What is being
Satisfied Satisfied?

Business
Definition
Vision/Mission

How are
customer
needs
being
satisfied -activities
-resources
-partners
The beginning

Who is being What is being

Satisfied Satisfied?

Business Basics of the Business are simple:

Definition
What is your business? What is your
Vision/Mission mission? What is your vision?
Who is being satisfied? Industry?
Markets? Customers?
How are What is being satisfied? What
customer problems are you addressing?
needs How are you meeting your customers
needs? Strategies? Products/services?
being
satisfied Cash inflow, outflow
Margin Gross Margin
Turnover
Return
Growth
 The Theory of the Business*

Required to maintain Leadership

How do we make money

Making the Difference

*: Peter Drucker
Strategy decisions, actions, resource allocations &
management, long term effect

Strategy formulation is based on Strategic Analysis

Strategic analysis of Internal and External environments

Financial statements are the best place to start
External Environment
Internal Analysis
Trends
Understand causes (for good as well as bad)

Strategic decisions (on what to do and what not to do) leads

to resource allocation --- hierarchical, from top to operating
units

Strategy Execution detailed action plan, managing,

monitoring, evaluation and control
What is Strategy?

Without a strategy, we fill our time with

- things we want to do, or
- do thing we think boss wants us to do, or
- by reacting

Without a strategy time and resources are easily wasted on

piecemeal , disparate activities

So, what is strategy one perspective

https://www.youtube.com/watch?v=NY4myVa5Wkw
 What is a business strategy?
Strategy is different from vision, mission, goals, priorities,
and plans. It is the result of choices executives make, on where
to play and how to win, to maximize long-term value.

Where to play specifies the target market in terms of the

customers and the needs to be served.

How to win spells out the value proposition that will

distinguish a business in the eyes of its target customers

maximize long-term value means when there are

mutually exclusive options to select those that will give the
greatest sustained increase to the companys economic value.
Strategy: An Executives Definition,
http://www.strategy-business.com/article/cs00002
Other perspectives

Strategy is a consciously and purposefully developed PLAN

Strategy is a PLOY to outmaneuver a competitor

Strategy is a PATTERN in a stream of actions, whether

intended or not

Strategy is a POSITION described either with respect to a

competitor, in the context of a number of competitors, or with
respect to markets

Strategy is a PERSPECTIVE, i.e. a certain mindset of how to

perceive the world
Strategy:

Strategy is a management plan

creating and sustaining a competitive advantage
There are generic strategies (Cost/Differentiation; market scope)
Strategy is never static
Result of proactive actions and reactive actions
must be crafted ensuring its executability.
Strategy at various levels of a company Hierarchy of strategies
Corporate, Business, Operations, Functions
Strategy and Business Models
Operational effectiveness is NOT strategy
Strategy is a set of UNIQUE activities and MUST tie them together.
Tradeoffs are very important
Key Elements of a Successful Strategy
Developing a successful strategy hinges on making
competitive moves aimed at
Appealing to buyers in ways to set the company apart
from rivals and
Carving out its own market position
Involves developing a distinctive aha element to
Attract customers and
Produce a competitive edge

Copying competitive moves of other

successful companies rarely works!
 Starbucks Strategy 2003-2008:
The Key Elements
Expand number of Starbucks stores domestically by blanketing
metropolitan areas, then adding stores on the citys perimeter
Make Starbucks a global brand by opening stores in an increasing
number of foreign locations
View each store as a billboard for the company and as a
contributor to building the companys brand and image
Broaden in-store products to include coffee-flavored ice cream,
teas, fresh pastries, music CDs, and coffee accessories
Fully exploit the growing power of the Starbucks name and brand
image with out-of-store sales
Display corporate responsibility and environmental sustainability
Control costs of opening new stores
Promote customer-friendly service and enhance store
ambience by making Starbucks a great place to work
Strategic Approaches to Building Sustainable
Competitive Advantage
Be the industrys low-cost provider
Achieve a cost-based competitive advantage
Incorporate differentiating features
Superior product/service keyed to higher quality, better
performance, wider selection, value-added services, or
some other attribute
Focus on a narrow market niche
Win a competitive edge by doing a
better job than rivals of serving the
needs and preferences of buyers in the niche
Develop expertise and resource strengths
not easily imitated or matched by rivals
Achieve a capabilities-based competitive advantage
Competitive Advantage Examples

Strive to be industrys low-cost provider

Wal-Mart
Southwest Airlines
Outcompete rivals on a key differentiating feature
Johnson & Johnson Reliability in baby products
Harley-Davidson King-of-the-road styling
Rolex Top-of-the-line prestige
BMW Engineering design and performance
Amazon.com Wide selection and convenience
Competitive Advantage Examples (cont)
Focus on a narrow market niche
eBay Online auctions
Best Buy Home electronics
McAfee Virus protection
Starbucks Premium coffees and coffee drinks
The Weather Channel Info about the weather

Develop expertise, resource strengths, and

capabilities not easily imitated by rivals
Walt Disney Theme park management and family
entertainment
Dell Computer Build-to-order manufacturing capabilities
Ritz-Carlton Personalized customer service
 WHAT IS STRATEGY ABOUT?
Strategy is all about How:
How to outcompete rivals.
How to respond to economic and market
conditions and growth opportunities.
How to manage functional pieces of the
business.
How to improve the firms financial and market
performance.
 WHY DO STRATEGY ?
A firm does strategy:
To improve its financial performance.
To strengthen its competitive position.
To gain a sustainable competitive. advantage
over its market rivals.
A creative, distinctive strategy:
Can yield above-average profits.
Makes competition difficult for rivals.
 STRATEGY AND COMPETITORS
Strategy is about competing differently from
rivals
Doing what they dont do or doing it better!
Doing what they cant do!
Doing that which sets the firm apart and attracts
customers.
Doing what we should or should not do to produce
a competitive edge.
Figure 1.1: Identifying a Companys Strategy

1-33
Why a Firms Strategy Evolves over
Time
Managers modify strategy in response to:
Changing market conditions
Advancing technology
Fresh moves of competitors
Shifting buyer needs
Emerging market opportunities
New ideas for improving the strategy
 The Evolving Nature of a Firms
Strategy
Realized (current) strategy is a blend of:
Proactive (deliberate) strategy elements that
include both continued and new initiatives.
Reactive (emergent) strategy elements that are
required due to unanticipated competitive
developments and fresh market conditions.
1.2 A Companys Strategy Is a Blend of Proactive Initiatives
and Reactive Adjustments
 Strategies
Intended strategies: Strategy that an organization
hopes to execute
Emergent strategies: Unplanned strategy that arises in
response to unexpected opportunities and challenges
Realized strategies: The strategy that an organization
actually follows. They are a product of both intended and
realized strategies
Deliberate strategy: The parts of the intended strategy
that an organization continues to pursue over time
Non-realized strategy: The parts of the intended
strategy that are abandoned
1-37
THE RELATIONSHIP BETWEEN A
FIRMS STRATEGY AND ITS
BUSINESS MODEL
Realized Business
Strategy $$$? Model
Competitive Value
Initiatives Proposition

Business
Profit Formula
Approaches
 A Companys Business Model
How the business will make money :
By providing customers with value.
The firms customer value proposition
By generating revenues sufficient to cover costs
and produce attractive profits.
The firms profit formula

It takes a proven business modelone that

yields appealing profitabilityto demonstrate
viability of a firms strategy.
 Relationship Between
Strategy and Business Model

Strategy . . . Business Model . . . Concerns

Deals with a companys whether revenues and costs
competitive initiatives and flowing from the strategy
business approaches demonstrate a business can be
profitable and viable

1-41
Microsofts Business Model
Employ a cadre of highly skilled programmers to develop proprietary
code; keep source code hidden from users

Sell resulting OS and software packages to PC makers and users at

relatively attractive prices to achieve a 90% or more market share

Most costs in developing software are fixed; variable costs are small;
once break-even volume is reached, revenues from additional sales
are almost pure profit

Provide modest level of technical support to users at no cost

Rejuvenate revenues by periodically introducing next-generation

software with features inducing PC users to upgrade their operating
systems
1-42
Red Hats Business Model
Rely on collaborative efforts of volunteer programmers to create the
software

Collect and test enhancements and new applications submitted by

volunteer programmers for evaluation and inclusion in new releases
of Linux

Market upgraded and tested family of Red Hat products to large

companies, charging a subscription fee that includes 24/7 support
within 1 hour in 7 languages

Make source code open and available to all users

Capitalize on specialized expertise required to use Linux by providing

fee-based training, consulting, software customization, and client-
directed engineering to Linux users
1-43
 Business Model Elements

The Customer Value Proposition

Satisfying buyer wants and needs at a price
customers will consider a good value.
The greater the value provided (V) and the lower the
price (P), the more attractive the value proposition is
to customers.
 Business Model Elements (contd)

The Profit Formula

Creating a cost structure that allows for
acceptable profits, given that pricing is tied
to the customer value proposition.
Vthe value provided to customers
Pthe price charged to customers
Cthe firms costs
The lower the costs (C) for a given customer value
proposition (VP), the greater the ability of the
business model to be a moneymaker.
 IS OUR STRATEGY A WINNER?

The Strategic
Fit Test

The Competitive Winning The Performance

Advantage Test Test
Strategy
WHAT MAKES A STRATEGY
A WINNER?
A winning strategy must pass three tests:
The Fit Test
Does it exhibit dynamic fit with the external and
internal aspects of the firms overall situation?
The Competitive Advantage Test
Can it help the firm achieve a significant and
sustainable competitive advantage?
The Performance Test
Can it produce good performance as measured by the
firms profitability, financial and competitive
strengths, and market standing?
WHY CRAFTING AND EXECUTING
STRATEGY ARE IMPORTANT TASKS
Strategy provides:
A prescription for doing business.
A road map to competitive advantage.
A game plan for pleasing customers.
A formula for attaining long-term standout
marketplace performance.

Good Strategy + Good Strategy Execution =

Good Management
 THINKING STRATEGICALLY
Googles web browser-based Chrome operating
system and its online applications suite are now
challenging Microsofts long-term dominance of
those marketplace sectors.
What should be Microsofts first response to this
competitive challenge?
How will Microsofts response to this competitors actions
affect its business model?
Which competitors strategy will likely be the eventual
winner in the marketplace?
 THE ROAD AHEAD
Strategy is about asking the right questions:
What must managers do, and do well, to make a firm a
winner in the marketplace?
Strategy requires getting the right answers:
Good strategic thinking and good management of the
strategy-making, strategy-executing process.
First-rate capabilities and skills in crafting and executing
strategy are essential to managing successfully.
Welcome and best wishes for your success!
Case Studies assignments

A few steps to follow

- read the case and make quick notes (issues, trends, review exhibits, etc.)
- review questions asked in the assignment
- based on case date, identify research/data needs
UML Online library has extensive databases available
DO NOT UPDATE THE CASE
obtain research data as of the case date
- re-read the case, this time, do an in-depth review/analysis
specifically, study exhibits
if financial data provided, do analysis (like ratios, trends, etc.)
- prepare the report
follow the format given in the assignment write-up