What is Strategy?

1. What is Strategy? Professor: Dr. Jade Lo

2. Some Reminders • Purchase the coursepack at HBS Publishing: https://cb.hbsp.harvard.edu:443/cbmp/access/26349778 • You still need to read the case even if you choose not to write about it

3. In this session, we will learn... • The difference between strategy and operational effectiveness (OE) • Why it is important to “be different” • How to be different by creating a unique strategic position • The importance of overall “fit” among all the activities

4. Do you agree with the following statement? Why (not)? • Mastering “best practices” is the key to success. • In today's hypercompetition, companies should try to constantly beat the selection and price of products/ services offered by the competitors. • Knowing what not to do is as important as knowing what to do.

5. What Strategy is not… • It is not about having “best practices” • Why? • Can a firm assure its long-term success by developing and implementing the most up-to-date best practices? • It is not about being efficient • OE is essential, but not sufficient to guarantee long-term profitability • It is not about trying to do everything and fulfilling every customer’s needs

6. Difference between OE and strategy Operational Effectiveness Strategy Performing different activities from rivals’ or performing similar activities differently About combination of activities • Performing similar activities better than rivals do • About individual activities/ functions

7. The importance of “making a difference” • Many best practices and management techniques are easy to copy • What makes a difference in the long run is your capability of making a difference! • Examples: • IKEA • How is IKEA different?

8. Basis for Strategic Positions • Different ways to think about strategic positions: • In terms of products/ services • What kind(s) of products/services do we provide? • In terms of customers • Needs-based positioning: What kind(s) of needs do we serve? • Access-based positioning: How do we best access our target customers? • These bases are not mutually exclusive; they often overlap

9. Products/ services variety • What kind(s) of products/services do we provide? • The focus is on product category(ies) • Do we offer a wide array of things or only a few items? • Example:

10. Customers’ needs • What kind(s) of needs do we serve? • The focus is on a particular group of customers • Do we seek to meet all the needs of our target customers or only a subset of them? • Example: Big 4’s multidisciplinary practices

11. Customers’ accessibility • Who are our target customers and how do we best reach them? • The focus is on particular ways to access the customers • Example:

12. Four generic strategies • Cost leadership vs. Differentiation • Focused vs. Broad • …Or combinations of these, for example: • Focused cost leadership (e.g. Southwest) • Focused differentiation (e.g. Neutrogena) • Do not attempt to do it all. It’s often hard to get the best of both worlds… (why?)

13. The Trade-offs • What if Starbucks started to offer fountain drinks in store? • What if BMW decided to appeal to the mass market by lowering the price? • It may be possible to achieve strategic “balance”, but it’s hard, because of the trade-offs. • If your position doesn’t involve trade-offs, it’s probably also not sustainable… (why?) • Taking a strategic position is about making choices– choosing what to do and notto do

14. The Importance of “Fit” • Each activity should at least be consistent with each other and with the overall strategy – • Even better, activities should reinforce or optimize each other! • Ask yourself: is each activity consistent with the overall positioning– the varieties produced, the needs served, and the type of customers accessed?

15. The Southwest Effect • The message is clear: “We’re affordable!” • What’s Southwest’s key success factors? What did it do to make it different? • Everything matters!

16. Southwest’s Success Factors • Locations: midsize cities or secondary airports in large cities • Target: Convenient-oriented and budget travelers • No meals, no-frill services • Fast turnarounds at the gate allows frequent departures with fewer aircraft • Low fares • It’s about the whole package, the fit among activities

17. Hypothetical Business Model of a Cost Leader Efficiency Volume Price Economies of Scale R&D Advertising Increased Margins Low Unit Cost Extra Profits

18. Hypothetical Business Model of a Differentiator Loyal Consumers Quality Premium Prices R&D Reputation Brand Mktg Extra Profits Investments Uniqueness Increased Margins

19. Mini Case: Wal-Mart • A humble beginning… • What was the basis for Wal-Mart’s initial positioning when it first started (variety, needs, or access-based)? • Which generic strategy does it take (cost-leadership, differentiation, focused, broad)? • Why is Wal-Mart’s position hard to imitate?

20. WAL-MART ACTIVITY MAP Always two suppliers to trade one off against other National advertising support Fanatical frugality Work ethic Cheerleader  Purchasing economies of scale Entire negotiation focus on price Partnership with key suppliers (Substantial cost savings) Family oriented Saturday morning pep rally Leadership (Sam Walton) Vendor Relations Pick up goods by themselves Sense of ownership “Store within store” Store managers have control of their operations Less error Automation Pick to light systems POS scanning Empowered employees Hub-and-spoke distribution system Shrink incentive plan, profit sharing, stock plans Suburban Cross-docking Rural Pricing Reputation Trucks are 60% full on back hauls industry average (20%) Reduced back room inventory All square footage devoted to selling Post competitors’ circulars Initially high advertisement (Everyday low prices) Lower advertising costs in the long run (13 times) Local monopolies Low Cost Culture/HRM Efficient Operations Market Position

21. The Take-home message • Strategy is NOT… • detailed instructions • operational effectiveness • best practices • customer satisfaction • performing a particular activity well • Strategy is… • An integrated and coordinated set of commitments and actions designed to gain a competitive advantage.