thinking strategically: the concept of strategy and the

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THINKING STRATEGICALLY: The Concept of Strategy and the Pursuit of Sustained Superior Profits

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Page 1: THINKING STRATEGICALLY: The Concept of Strategy and the

THINKING STRATEGICALLY:

THINKING STRATEGICALLY:

The Concept of Strategy and the Pursuit of Sustained Superior Profits

Page 2: THINKING STRATEGICALLY: The Concept of Strategy and the

Business PropositionBusiness Proposition

Profits = Quantity (Revenue - Cost)

3 most fundamental variables in Business

MARGIN

Page 3: THINKING STRATEGICALLY: The Concept of Strategy and the

Domain of Strategy Domain of Strategy

• strategic competitiveness and above normal returns• concerns managerial decisions and actions which

materially affect the success and survival of business enterprises

• involves the judgment necessary to strategically position a business and its resources so as to maximize long-term profits in the face of irreducible uncertainty and aggressive competition

• strategy is the linkage between a business and its current and future environment

Page 4: THINKING STRATEGICALLY: The Concept of Strategy and the

Key Characteristics of Strategic DecisionsKey Characteristics of Strategic Decisions

What makes a decision strategic?• decision-making in the face of irreducible uncertainty• requires irreversible commitments...involves allocation

of sunk investments ($, time, tangible & intangible resources)

• requires choice and trade-offs• multi-functional in scope/consequences• entrepreneurial theorizing/future oriented• infrequent and non-recurring• dealing with competition• concerning the external environment... primarily

product/market choices

Page 5: THINKING STRATEGICALLY: The Concept of Strategy and the

DefinitionsDefinitions

• The determination of the long run goals and objectives of an enterprise, and the adoption of courses of action and the allocation of resources necessary for carrying out these goals

• Alfred Chandler, Strategy and Structure

Page 6: THINKING STRATEGICALLY: The Concept of Strategy and the

Distinguishing Strategy from TacticsDistinguishing Strategy from Tactics

• Strategy is the overall plan for deploying resources to establish a favorable position

• Tactic is a scheme for a specific maneuver

Page 7: THINKING STRATEGICALLY: The Concept of Strategy and the

Common Elements in Successful Strategy

Successful Strategy

Profound understanding of the competitive environment

Objective appraisal of resources

Long-term, simple and agreed uponobjectives

$

EFFECTIVE IMPLEMENTATION

Source: Adapted from Robert S. Grant, 1991

Page 8: THINKING STRATEGICALLY: The Concept of Strategy and the

Concepts of Firm PerformanceConcepts of Firm Performance

• firm survival• accounting profits (ROA, ROE, ROS)

• surplus of revenues over expenses

• economic profit/rent (economic value added, positive NPV)

• normal return on capital • abnormal return - surplus after all inputs

• shareholder value/market value…(EVA, Tobin’s q)

• Change in market value over time

Page 9: THINKING STRATEGICALLY: The Concept of Strategy and the

Above Normal Profits

(in Excess of the Competitive Level)

AvoidCompetitors

Be Better ThanCompetition

AttractiveIndustry

AttractiveNiche Cost

AdvantageDifferentiation

Advantage

AttractiveStrategic

Group

Entry Barriers

Mobility Barriers

Isolating Mechanisms

Sources of Superior PerformanceSources of Superior Performance

Page 10: THINKING STRATEGICALLY: The Concept of Strategy and the

Elements of a StrategyElements of a Strategy

1. BUSINESS DEFINITION

Customer Needs

Technology

Products

Geographic Scope

2. BUSINESS STRATEGIC INTENT

Direction

Rate

Priorities

Page 11: THINKING STRATEGICALLY: The Concept of Strategy and the

Elements of a StrategyElements of a Strategy

3. FINANCIAL TARGETSShort-term Long-term

ROAROEROS

4. SOURCES OF COMPETITIVE ADVANTAGEReputation and Consumer LoyaltyBrand nameProducer LearningEconomies of Scale and/or ScopeLocationAccess to lower cost factors of productionDistribution and Shelf-spaceetc.

Page 12: THINKING STRATEGICALLY: The Concept of Strategy and the

Elements of a StrategyElements of a Strategy

5. KEY STRATEGIC DIMENSIONS Product line Specialization

Brand IdentificationPush vs Pull MarketingSelling ApproachDistribution and Channel SelectionProduct QualityTechnological leadershipVertical IntegrationCost PositionCustomer ServicePrice PolicyFinancial LeverageRelationship with Parent Company, if any

Page 13: THINKING STRATEGICALLY: The Concept of Strategy and the

Elements of a Strategy

6. VALUE-ADDING ACTIVITIES

Research

Development

Procurement

Raw Material Processing*

Intermediate Production*

Final Production*

Marketing

Selling

Distribution*

Customer Service*

* For service businesses use Production Operations, Support Operations, and Delivery Operations instead.

Page 14: THINKING STRATEGICALLY: The Concept of Strategy and the

Elements of a StrategyElements of a Strategy

7. COMPETITIVE STRATEGY Competitor A Competitor B Competitor C Competitor D

etc.

Page 15: THINKING STRATEGICALLY: The Concept of Strategy and the

Levels of StrategyLevels of Strategy

• Corporate strategy... defines the scope of the business in terms of the industries and markets in which it competes.• includes decisions about diversification, vertical integration,

acquisitions, new ventures, divestments, allocation of scarce resources between business units

• Business strategy... is concerned with how the firm competes within a particular industry or market... to win a business unit must adopt a strategy that establishes a competitive advantage over its rivals.

• Functional strategy... the detailed deployment of resources at the operational level

Page 16: THINKING STRATEGICALLY: The Concept of Strategy and the

Levels of Strategy

Division A

R & D Personnel Finance Production Marketing/Sales

Division B

R & D Personnel Finance Production Marketing/Sales

Source: Robert M. Grant, Contemporary Strategy Analysis, Basil Blackwell, 1991.

FUNCTIONALSTRATEGIES

BUSINESSSTRATEGY

CORPORATESTRATEGY

CORPORATEHEAD OFFICE