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An Overview of Strategy: Past, Present, and Future. James Oldroyd Kellogg Graduate School of Management Northwestern University J-oldroyd@northwestern.edu. Overview of Strategy. Definition and Brief History of Strategy Industry Strategy Firm Strategy Business Unit Strategy

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an overview of strategy past present and future

An Overview of Strategy: Past, Present, and Future

James Oldroyd

Kellogg Graduate School of Management

Northwestern University

J-oldroyd@northwestern.edu

overview of strategy
Overview of Strategy
  • Definition and Brief History of Strategy
  • Industry Strategy
  • Firm Strategy
  • Business Unit Strategy
  • Current Trends in Strategy
          • Business Building
          • Growth Short-term and Long-term
  • Conclusion
are these strategies
Are these Strategies?
  • “Become a $125 billion company by the year 2000” (1990)
  • “Crush Adidas” (1960s)

"A PC on every desktop and in every home," to the broader (and, yes, even more ambitious) "Great software anytime, anyplace and on any device"

  • “Become the company most known for changing the worldwide poor-quality image of Japanese products” (1950s)
  • “Become the Harvard of the West” (1940s)
what is strategy
What is Strategy?

The science and art of military command exercised to meet the enemy in combat under advantageous conditions

  • Merriam Webster
  • Dictionary

Leverage of core competence to achieve competitive innovation (changing the rules of the game). It as about being different.

  • Michael Porter

Strategy is about being different. It means deliberately choosing a different set of activities to deliver a unique mix of value

  • Hamel and Prahalad

The use of valuable, rare, non-substitutable, and appropriable resources and capabilities to create sustainable advantage

  • Resource-based view
strategy as art the military analogy
Strategy as ArtThe Military Analogy
  • Von Clausewitz view of strategy:
  • Strategy was not a formula. Detailed planning always failed due to change events, imperfections in execution, and the leadership of the opposition.
  • Strategy was the art of the broken-field runner; strategy was not a lengthy plan, but an idea that evolved through changing circumstances.
  • Strategy involved the instinctive savvy of the best generals
demand for strategy and the rise of strategy as science
Demand for Strategy and the Rise of Strategy as Science

Single Business Firms

Strategy as an art is no longer adequate

Post WWII

Multi-divisional Firms

New Managerial Problems: What to buy?

What to sell?

How to allocate resources?

How to achieve synergy?

Intuition and experience alone cannot manage the multi-divisional firm

strategy is
Strategy is….
  • What really makes the difference between success and failure?
  • What will factors will change in the future?
  • What Customers groups served?
  • What customer needs do you satisfy?
  • How might your markets change with time?
  • Existing and potential competitors
  • SWOT
  • Unique core competencies
  • Assumptions
  • Future moves
  • What do you do well compared to competitors?
  • What do you need in the future?

Kenneth Andrews, The Concept of Corporate Strategy” (pp.18-19).

three levels of business strategy
Three Levels of Business Strategy

Industry

Firm

Business Unit

  • Which Business Units?
  • Business Unit Boundaries
  • Managing Cross Business Synergies
  • Choose Your Sandbox
  • Business Definition
  • Firm Resources

Strategic Advantage

overview of strategy9
Overview of Strategy
  • Definition and Brief History of Strategy
  • Industry Strategy
  • Firm Strategy
  • Business Unit Strategy
  • Current Trends in Strategy
          • Business Building
          • Growth Short-term and Long-term
  • Conclusion
industry strategy
Industry Strategy

Industry

Firm

Business Unit

  • Which Business Units?
  • Business Unit Boundaries
  • Managing Cross Business Synergies
  • Business Definition
  • Firm Resources
  • Choose Your Sandbox

Strategic Advantage

average annual returns of u s manufacturers 1970 1990
Average Annual Returns of U.S. Manufacturers 1970-1990
  • ROEROAROS
  • Drugs 21.4% 11.8% 13.1%
  • Food and Kindred Products 15.2 6.6 3.9
  • Chemicals and Allied Products 15.1 7.5 7.2
  • Fabricated Metal Products 12.3 5.7 3.7
  • Motor Vehicles and Equipment 11.6 5.6 3.7
  • Textile Mill Products 9.3 4.3 2.5
  • Iron and Steel 3.9 1.5 1.3

Source: Anita McGahan, Harvard Business School

slide12

A Cautionary Note

People began to notice problems with the industry approach…

Year

Rest of World

Industry

Year

2%

Industry

  • In the U.S., corporate strategy is typically the icing on the cake, not the cake itself
    • Business units must be competitive on their own merits
    • …in attractive industries
    • But the icing can make the decision difference between a good cake and a bad one

U.S.

18%

3%

10%

Corporate

Business

Transient

Transient

Group

parent

42%

11%

46%

4%

Business

Firm

segment

34%

30%

In much of the rest of the world, corporate strategy is more prominent

Membership in a diversified entity has a larger effect on profitability

The effect on profitability is more likely to be positive

Source: Tarun Khanna and Jan W. Rivkin, “Estimating the Performance Effects of Business Groups in Emerging Markets,” Strategic Management Journal, 2000

Countries: Argentina, Brazil, Chile, India, Indonesia, Israel, Mexico, Peru, the Philippines, South Africa, South Korea, Taiwan, Thailand, and Turkey

Source: Anita M. McGahan and Michael E. Porter, “How Much Does Industry Matter Really?” Strategic Management Journal, 1997

persistence of superior returns by industry
Persistence of Superior Returns by Industry

The Typical cross-country correlation in in dusty profitability is extremely weak

Source: Tarun Khanna, Harvard Business School

persistence of superior returns 1980 1989
Persistence of superior returns 1980-1989

Source: Geoff Waring, “Industry differences in the persistence of Firm-specific Returns” 1996

overview of strategy15
Overview of Strategy
  • Definition and Brief History of Strategy
  • Industry Strategy
  • Firm Strategy
  • Business Unit Strategy
  • Current Trends in Strategy
          • Business Building
          • Growth Short-term and Long-term
  • Conclusion
firm strategy
Firm Strategy

Firm

Industry

Business Unit

  • Which Business Units?
  • Business Unit Boundaries
  • Managing Cross Business Synergies
  • Choose Your Sandbox
  • Business Definition
  • Firm Resources

Strategic Advantage

value creation and a firm s positioning
Value Creation and a Firm’s Positioning

Willingness to Pay

Customer

Firm

Total value created

Supplier

Supplier opportunity cost

value division

Willingness to Pay

Value Captured by Customer

Price

Value Captured by Firm

Cost

Value Captured by Supplier

Supplier opportunity cost

Value Division

Customer

Firm

Supplier

Added Value is the total value created with the firm in the game – total value created without the firm in the game or the value that would be lost to the world if the firm disappeared. A firm cannot capture more than its added value.

examples of added value

Differentiation

Low Cost

Mom and Pop Store

K-mart

Wal-mart

Goldman Sachs

Merrill Lynch

Examples of Added Value

Dual Advantage

Willingness to Pay

Supplier opportunity cost

Burger King

McDonald’s

generic strategies
Generic Strategies

Product Leadership

Faster

Closer

Customer Intimacy

Operational Excellence

Better

Source: Adapted from Treacy and Wiersema, The Discipline of Market Leaders. Perseus Books. 1995

value added and competitive advantage
Value Added and Competitive Advantage

Competitive Advantage

Willingness to Pay

  • Added Value - Goal is to drive a wedge between willingness to pay and (supplier opportunity) cost

Value Captured by Customer

Value Added

Price

Value Captured by Firm

Cost

Value Captured by Supplier

Supplier opportunity cost

  • Problem: a firm must often incur higher costs to deliver a better product or service
strategies for shaping the wedge
Strategies for Shaping the Wedge

Value

Value Added Strategy Sony

Strategic Moves

High

Segmentation Strategy Mercedes Charles Schwab

Industry Pressures

Price

Process Innovation Wal-mart

Strategic Moves

Low

Service Innovation DELL Coca Cola

Low

High

Cost-to-Service

Source: Adapted from “Beating the Commodity Magnet” V. Kasturi Rangan and George Bowman. Harvard Business School Note 1994

mini case marketing strategy at delta
Mini-Case: Marketing Strategy at Delta

In the mid 1980s Delta’s market researchers found that customers (particularly business customers) were strongly influenced to choose a particular airline by the airline’s frequent flyer program. Consequently, to motivate customers to choose Delta, they teamed up with American Express (an exclusive arrangement) to offer a special program: customers could receive triple miles if they would fly on Delta and purchase the tickets using the American Express card.

How would you evaluate Delta’s strategy? (Good or bad?)

constraints of strategy
Constraints of Strategy
  • Environment
  • Pressures
  • Constraints
  • Opportunities
  • Stability or Change
  • Resources
  • Availability
  • Future scarcity
  • History
  • Key Events
  • Organizational Change
overview of strategy25
Overview of Strategy
  • Definition and Brief History of Strategy
  • Industry Strategy
  • Firm Strategy
  • Business Unit Strategy
  • Current Trends in Strategy
          • Business Building
          • Growth Short-term and Long-term
  • Conclusion
business unit strategy
Business Unit Strategy

Business Unit

Industry

Firm

  • Choose Your Sandbox
  • Business Definition
  • Firm Resources
  • Which Business Units?
    • Role definition and integration
  • Business Unit Boundaries
    • External and Internal
  • Managing Cross Business Synergies

Strategic Advantage

which business units

Relative

Share

Low

High

High

Star

?

Relative Share

Market Growth Rate

Cash Cow

Problem Child

Dog

Low

Which Business Units?

Focus on Market Share

Boston Consulting Group Portfolio Model

which business units28
Which Business Units?

General Electric Model

Business Unit Position

High Med Low

Build

Industry Attractiveness

Hold

Low Med High

Harvest

business unit boundaries

Solution

  • Regard match of business portfolio to markets as temporary
  • Pay attention to SCALE of businesses as well as focus
  • Patching executive at multibusiness level
  • Economies of scale AND agility
  • Traditional RV Market Segments
  • Honda Segments
  • Minivans
  • Odyssey:
  • Shorter than a minivan but bigger than station wagon
  • Station wagon
  • Criteria:
  • Compact-cum-wagon with “Godzilla” styling
  • Compact sedans
  • CR-V:
  • Similar to Jeep Cherokee but smaller and built on the Honda Civic platform
  • Sport utility vehicle
Business Unit Boundaries

Common Complaints

  • Our business are organized around a market and when a market changes the business unit fails.
  • We miss opportunities that fall between business units.
  • Our organization is set in stone, it is impossible to change.

Source: Adapted from Kathy Eisenhardt, Stanford, 2002

example
Example –
  • 1994
  • 1996
  • 1998
  • Large customers
  • Large companies
  • Global enterprises
  • Large companies
  • Midsize companies
  • Small customers
  • Government and education
  • Midsize companies
  • Federal
  • Small customers
  • State and local
  • Education
  • Small companies
  • Consumers

Source: Adapted from Kathy Eisenhardt, Stanford, 2002

business unit synergies

Solution

  • A few temporary collaborations with exceptional payoffs
  • Manage NUMBER of collaborations, not just focus
  • Senior managers set context for collaboration, businesses decide
  • Synergies AND individual business success
  • sharing movie characters across businesses
  • Selective collaboration (e.g., Disney characters not shared with Touchstone)
  • Senior executives set collaborative context (e.g., synergy meetings, calendar, synergy managers, training boot camp), but business managers make the choices
  • “Key to earning a big return is to replicate knowledge” – John Browne, CEO
  • SBUs belong to 1 of 4 peer groups for knowledge exchange, facilitated by electronic yellow pages
  • Participation is voluntary and comes out of SBU budget
Business Unit Synergies

Common Complaints

  • Senior management wants cross-business synergies, but is unsuccessful
  • Orchestrating collaboration across businesses is a time sink

Source: Adapted from Kathy Eisenhardt, Stanford, 2002

tests of corporate synergy
Weak tests:

Does the portfolio outperform a benchmark portfolio of otherwise comparable but focused companies?

Is the business better off as part of the corporation than it would be by itself?

Stronger tests:

Does each business unit within the corporation outperform comparable focused companies?

Is the business better off as part of this corporation than it would be under any other parent or organizational arrangement?

Tests of Corporate Synergy
overview of strategy33
Overview of Strategy
  • Definition and brief history of Strategy
  • Industry Strategy
  • Firm Strategy
  • Business Unit Strategy
  • Current Trends in Strategy
          • Business Building
          • Growth Short-term and Long-term
  • Conclusion
business building imperative
Business Building Imperative

What Percent of Companies will fall out of the S&P 500 by 2020?

Answer = 50%

Percent of Market Capitalization in December 1999 by Newly Created Businesses Within the Companies from 1990-1999.

95

90

50

CORNING

Fiber optics

Global Services

Handsets

Source: Adapted from McKinsey and Company, 2002

the role of corporate and the business units
The Role of Corporate and The Business Units
  • Create

Corporate primary focus is to create, exchange, and destroy assets

Business Unit’s Primary focus is to operate assets

  • Operate
  • Trade/ destroy

Source: Adapted from McKinsey and Company, 2002

business building requires a shift in focus

General Electric’s evolving business portfolio mix

  • Revenue breakdown by business
  • Other products

100%

90%

  • Broadcasting

80%

70%

  • Financial services

60%

50%

  • Aerospace, aero-engines, materials, technical support

40%

30%

20%

10%

  • Electrical products

0%

1997

1977

1987

Business Building Requires a Shift in Focus

Acquire/develop options on the periphery

Create

More time

  • Operate
  • Reduce time spent managing operations

Less time

  • Trade/ destroy

Cannibalize/sell developed businesses

More time

Source: Adapted from McKinsey and Company, 2002

growth as a strategic imperative
Growth as a Strategic Imperative

No company ever shrank to greatness

Our shareholders want profit improvement very soon. In the short term, the only solution is to get rid of people and assets.”

  • Wayne Calloway, PepsiCo

(Gertz & Baptista)

Every dim-witted idea I see is now dressed up as a growth initiative.”

Fortune 1000 CEO

You can’t save your way to prosperity”

Fortune 500 CEO

some myths of growth
Some Myths of Growth
  • Growth is common(compound growth for F500 1983-1993, adjusted for inflation, was -.33%)
  • Big companies can’t grow(virtually no correlation between firm size and growth rate)
  • We’re in a “dead industry”(some companies in dead industries have recorded double-digit growth rates)
    • “If it’s a choice between investing in a good company in a great industry, or a great company in a lousy industry, I’ll take the great company in the lousy industry any day …It’s the company, stupid.” Peter Lynch
  • Most large company growth is created through acquisition(Nucor, MBNA internal growth; Traveler’s was a sum of a series of acquisitions)
  • Cost cutting sets the stage for growth (only 7% of profitable growers were cost cutters in prior period)

Source: Jeff Dyer, Brigham Young University, 2001

alternative modes of growth
Alternative Modes of Growth

Internal

Alliances

  • Geographic
  • Related product
  • New opportunities
  • Proliferation
  • Extension
  • New venture
  • Non-equity
  • Equity
  • JV
  • Vertical
  • Horizontal

Acquisition

  • Vertical
  • Horizontal
  • Diversification
  • Partial
  • Takeover
short term growth

Solution

  • Genetic evolution
    • Traditional businesses (and people) are combined with new approaches
    • New businesses refresh traditional ones
    • Traditional businesses are occasionally re-combined
    • Multiple growth paths are traveled
    • Existing businesses are culled
  • Old AND new
  • Lexus entry into luxury market, built on
    • Discarded, experimental, midsize, Asian market product platform
    • New dealerships, brand images, styling, technology
    • Rearchitected selected engineering features
  • Refreshed lower priced name plates with Lexus technology
  • Sophisticated combination of mutations, recombinations, and refreshers
  • Combined camera skills (optics technology, management of dealers, high-volume assembly) with new copier product
  • Combined print engines from copiers with new laser printer product and OEM channel into print engine business
  • Refreshed copier business with sophisticated control technology from laser printers
  • Recombined dealer management, high-volume assembly, copier and laser printer technology to launch fax machines business
  • Diversified into high-volume, low-cost, in-store banking outlets with service-training of sales force from theme park companies
  • Newly trained salesforce re-vitalized traditional branch network
Short-term Growth

Common Complaints

  • New businesses suffocate in shadow of legacy ones
  • New businesses thrive while traditional businesses languish
  • Roadblocks on previously successful growth paths

Source: Adapted from Kathy Eisenhardt, Stanford, 2002

long term growth

Solution

  • Probe the future
    • Wide-variety of low-cost probes
  • Manage NUMBER of probes, not just type. More probes, more variety with more uncertainty
  • Create identity of company, not vision of industry
  • 15 month intuition, 5 month plan, 5 week schedule
  • “You’ve got to make sure you have feelers out to see when things are about to achieve critical mass” - Bill Gates, COB
  • Small investments in 3 video compression technologies
  • Both internal projects and “Blue Sky” projects
  • Organic experiments w/futures trading, Market Buzz, AdvisorSource
  • Alliances w/Goldman Sachs for IPOs, Great West Life for direct life insurance
  • In-house futurists
  • “You’ve got to experiment…strategy is about buying options…then picking the best ones” – John Browne, CEO
  • Drilling experiments on Andrew oil field led to revolutionary horizontal drilling technique
  • Limited JV with Safeway to experiment with integrated food and fuel convenience stores

Source: Adapted from Kathy Eisenhardt, Stanford, 2002

Long-term Growth

Common Complaints

  • Strategic plans are created, then ignored
  • Strategic plans are wrong
  • Short-term performance takes priority over future thinking
overview of strategy42
Overview of Strategy
  • Definition and Brief History of Strategy
  • Industry Strategy
  • Firm Strategy
  • Business Unit Strategy
  • Current Trends in Strategy
          • Business Building
          • Growth Short-term and Long-term
  • Conclusion
the synthesis of strategy

Industry

Firm

Business Unit

  • Choose your sandbox
  • Which business units?
  • Business unit boundaries
  • Managing cross business synergies
  • Business Definition
  • Firm Resources

Strategic Advantage

The Synthesis of Strategy

the science and art of military command exercised to meet the enemy in combat under advantageous conditions

Downsizing

Leverage of core competence to achieve competitive innovation (changing the rules of the game)

Globalization

  • Merriam Webster
  • dictionary

Re-engineering

  • Michael Porter

“Strategy is about being different. It means deliberately choosing a different set of activities to deliver a unique mix of value”

Time-base Competition

  • Hamel and Prahalad

New Business Model

Country capabilities

Where does competitive advantage come from? The use of valuable, rare, non-substitutable, and appropriable resources and capabilities to create monopoly or rents

  • Resource-based view

Knowledge-based Competition

Network Organizations

Core Competencies

key debates in strategy
Key Debates in Strategy

Strategy Formulation vs. Strategy Implementation

Can you create sustainable competitive advantage?

Which is most valuable-physical assets or intangibles

Where is the most value created?

conclusion elements of a good strategy
Conclusion: Elements of a Good Strategy

A good strategy includes:

  • Customer Needs
  • Competitive Position
  • Resources and Capabilities Underlying Strategy
  • Internal/external Constraints
  • Levels of Uncertainty

Understanding and Analysis of:

strategy and execution
Strategy and Execution

Strategy

Strong

Weak

Doomed to

Fail

A Botched

Job

Weak

Execution

A Good

Chance for

Success

Flirting with

Disaster

Strong

leadership tasks
Leadership Tasks…

Managing Resources

Recognize the added value of each resource and applying the proper resource in the appropriate way at the appropriate time.

Protecting Resources

Develop Exclusive legal franchises; Patents; Channel Crowding; Causal ambiguity; Learning curve; Buyer switching costs; Reputation

Recognize which resources will be valuable in the future and building those resources now. Preserving existing resources.

Allocating Resources

Source: David Besanko and Anne Gron “Notes on the Resource-based view of the Firm 2000. Kellogg School of Management

the need for leadership
The Need for Leadership
  • "There is nothing which rots morale more quickly and more completely than . . . the feeling that those in authority do not know their own minds."

Lionel Urwick

framework for organizational diagnosis
Framework for Organizational Diagnosis

1 Vision

2 Strategy

4Decision Support Systems

3 Structure

6Human Resource Systems

5Reward Systems

7Organization Culture

PERFORMANCE

Source: Robert Duncan, 1999

framework for organizational diagnosis50
Framework for Organizational Diagnosis

1 Vision

2 Strategy

4Decision Support Systems

3 Structure

6Human Resource Systems

5Reward Systems

7Organization Culture

PERFORMANCE

Source: Robert Duncan, 1999