1

CHAPTER
McGraw-Hill/I rwin
Copyright 2013 by The McGraw-Hill Companies, I nc. All rights reserved.
What Is Strategy and
Why Is It Important?
All about me
Raised in Nor. California
Undergrad & MaCC @
BYU
Started my own Window
Washing Company, also
employed in various retail
jobs & Sales Manager w/
Preventive Pest Control
Interests:
Learning, Exercising,
Travel, Thinking Games &
Watching/Helping Things
Grow


And now you!
Your Name
Major
Hometown
Work experience
Interests
Get ready to talk in this class.

The Class
Cases
Mini & Practicum (TMT)
Groups
Assignedsit w/ group

Professionalism
Absences/Coming Late
Comments
Tech in Class
Grading Qs
14

Group

Primary Case

#1

Montague

#2

Southwest Airlines

#3

Glass Egg

#4

Netflix

#5

HTC Corp.

#6

LEGO
Brain Teaser
Three people are tied up in a line, one behind
the other. Person 1 is in front, person 2 next,
and person 3 in the back. There are 5 hats they
can wear, 3 black and 2 white. Nobody can see
their own hat color, they can only see the color
of the hat(s) in front of them. The people must
declare their own hat color within 5 minutes or
else be killed. After 4.5 minutes the person in
front correctly names his hat color, how did he
know and what color was his hat?

3 Minutes. Go!
15
The Wisdom of Choice
To try and fail is at least to learn; to fail to try is to
suffer the inestimable loss of what might have been.

Chester Barnard
(former CEO of New Jersey Bell Telephone)

The Functions of the Executive
Part 1 Strategy Analysis
LO 1-1 Define competitive advantage, sustainable competitive
advantage, competitive disadvantage, and competitive parity.
LO 1-2 Define strategy and explain its role in a firms quest for
competitive advantage.
LO 1-3 Explain the role of firm effects and industry effects in determining
firm performance.
LO 1-4 Describe the role of corporate, business, and functional managers
in strategy formulation and implementation.
LO 1-5 Outline how business models put strategy into action.
LO 1-6 Describe and assess the opportunities and challenges managers
face in the 21st century.
LO 1-7 Critically evaluate the role that different stakeholders play in the
firms quest for competitive advantage.
18
What Strategy is: Gaining and Sustaining
Competitive Advantage
What is Competitive Advantage?

Superior performance relative to competitors
Examples: Google, Pfizers Lipitor (patent
protection to 2010)

What is Sustainable Competitive Advantage?

Sustainable competitive advantage occurs when a firm
implements a value-creating strategy of which other
companies are unable to duplicate the benefits or find
it too costly to imitate.

An important basis for sustainable competitive advantage
is the development of resources and capabilities.

19
What Strategy is: Gaining and Sustaining
Competitive Advantage
What is Strategy?

Goal-directed actions to gain & sustain competitive advantage

It is not a zero-sum game
Win win scenarios co-opetition (i.e.,
collaborative efforts among competitors for
mutual gain)

Requires trade-offs for strategic positioning
(low cost) JCPenney vs. (upscale) Neiman
Marcus
(low cost) Southwest Airlines vs. (stuck in the
middle) Delta Song

Strategy as a Theory of How to Compete
Provides a Manager's Roadmap

The strategic management process is a cycle of analysis,
formulation, implementation, and feedback.

Apple Newton flops in 1993
PalmPilot (Jeff Hawkins) learned from Apple Newtons
mistakes
iPhone a huge success in 2009
Wal-mart' (Sam Waltons) assumptions about low costs,
low prices, and high volume to drive profitability
Auto industry differences between U.S. and Japan

Palm Video
EXHIBIT 1.2 What is Strategy?
Definition: Strategy is the quest to create, capture, and
sustain competitive advantage.

It is the managers theories/maps 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 has alternatives, consequences, and choices involving significant
resources, typically made under some level of uncertainty.

It requires long-term commitments that are not easily reversible.
112
Key Drivers of Value Creation and
Sustainable Competitive Advantage

Generating economic value can be accomplished
through:

REVENUE drivers

COST drivers

RISK drivers

113
Value and Cost Drivers
Figure 2.5
LO 1-1 Define competitive advantage, sustainable competitive advantage,
competitive disadvantage, and competitive parity.
LO 1-2 Define strategy and explain its role in a firms quest for competitive
advantage.
LO 1-3 Explain the role of firm effects and industry effects in
determining firm performance.
LO 1-4 Describe the role of corporate, business, and functional
managers in strategy formulation and implementation.
LO 1-5 Outline how business models put strategy into action.
LO 1-6 Describe and assess the opportunities and challenges
managers face in the 21st century.
LO 1-7 Critically evaluate the role that different stakeholders play in the
firms quest for competitive advantage.
115
EXHIBIT 1.1 Industry, Firm, and Other Effects Explaining Superior Firm Performance
Industry vs. Firm Effects in Performance
Astute managers create superior performance
Making important trade-offs
- Toyotas lean manufacturing
116
Strategy Across the Levels
Where to Compete?
Should GE move more
aggressively into the
health care industry?

How to Compete?
Should GE jet engines
have better fuel efficiency
than Rolls Royce?

How to Implement?
Should GE human
resources recruit more
science graduates?
CORPORATE
STRATEGY



BUSINESS
STRATEGY



FUNCTIONAL
STRATEGY
117
18
Sources of Superior Profitability
RATE OF PROFIT
ABOVE THE
COMPETITIVE
LEVEL
How do we
make
money?
INDUSTRY
ATTRACTIVENESS
Which
businesses
should we be
in?
COMPETITIVE
ADVANTAGE
How should
we compete?
CORPORATE
STRATEGY
BUSINESS
STRATEGY
Levels of Strategy
Corporate Level: Typically involves decision-making by
the top management team that includes the CEO, senior
executives, the board of directors, and the corporate staff.
Decisions include vertical integration, diversification, strategic
alliances, acquisitions, new ventures, and restructuring.
Evolution Fresh
Business Level: Includes the strategic choice of generic
strategy (cost leadership, differentiation, focus) and the
benefits and costs of first-mover advantages. Often an
enterprise participating in multiple businesses will have
different business strategies.

Functional Level: Typically directed at improving the
effectiveness of functional operations within a company, such
as manufacturing, materials management, human resources,
marketing, R&D and operations management.
119
Coffee
Evolution Fresh juices
Evolution Harvest Snacks
EXHIBIT 1.3
Strategy Formulation and Implementation Across Levels:
Corporate, Business, and Functional Strategy
Business Models
Putting Strategy into Action

"Razor-blade model" (e.g., laser printers)

Subscription model (free cell phone
along with wireless plan)

How is the firm going to make money to
continue operations?

Whats happening now between Microsoft
and Google?

Business models in opposite directions
121
EXHIBIT 1.4
Competing Business Models: Google vs. Microsoft
Multi-point Competition
Microsoft
Google
Software
Apps
Online
Search
Operating
Systems
122
Strategy in the 21
st
Century
Accelerating Technological Change:
84 years for half of U.S. families to own a car;
28 years for half to own a TV;
19 years for the PC to reach 50% ownership;
6 years for an MP3 player.
123
EXHIBIT 1.5
Accelerating Speed of Technological Change
124
Strategy in the 21
st
Century
A Truly Global World
BRIC countries have 40% of earths population
Brazil, Russia, India, and China
IBM has less than 30% of its employees in the U.S.
Bottom of the pyramid business opportunities
Grameen Bank in India: Microcredit
Thomas Friedman-Flat World
125
EXHIBIT 1.6
Geographic Sources of IBM Revenues, 2010
Is IBM still a U.S. company ?
126
Strategy in the 21
st
Century
Future Industries
Health Care
In the U.S., over 16% of GDP and still growing
Green Economy
Potentially large growth in energy efficiency
and technologies (e.g., solar panels)
WEB 2.0
Interactivity and using collective intelligence on the
Internet. Subject to "network externalities"
127
128
STRATEGY HIGHLIGHT 1.1
Threadless: Leveraging Crowdsourcing
to Design Cool T-Shirts
Online apparel company: Threadless
Started in 2000 with $1,000 by 2 students
Jake Nickell and Jacob Dehart

Prosumers a hybrid supplier/customer
Shirt designs are submitted by the community
Designs are voted on by the online community
Only winning designs are produced & sold
Crowdsourcing: volunteers for tasks
Threadless Interview
LO 1-1 Define competitive advantage, sustainable competitive advantage,
competitive disadvantage, and competitive parity.
LO 1-2 Define strategy and explain its role in a firms quest for competitive
advantage.
LO 1-3 Explain the role of firm effects and industry effects in determining
firm performance.
LO 1-4 Describe the role of corporate, business, and functional managers
in strategy formulation and implementation.
LO 1-5 Outline how business models put strategy into action.
LO 1-6 Describe and assess the opportunities and challenges managers
face in the 21st century.
LO 1-7 Critically evaluate the role that different stakeholders play in
the firms quest for competitive advantage.
129
The Managers Role in Balancing Expectations
Business Roundtable:
Balancing the shareholders expectations of maximum
return against other priorities is one of the fundamental
problems confronting corporate management.

Understanding corporate strategy means understanding the
competing value claims of multiple stakeholders.

Stakeholders are the individuals and groups who can affect,
and are affected by, the strategic outcomes achieved.

EXHIBIT 1.8
Internal and External Stakeholders
131
Our Learning Goals:
Pushing Down Through Blooms Taxonomy
Our Learning Goals:
Pushing Down Through Blooms Taxonomy
1. Knowledge: remember
material; know terms, facts,
procedures, basic concepts
2. Comprehension:
grasp meaning; understand
facts, interpret charts,
translate verbal to math
estimate consequences
3. Application: use
material in new situations;
apply concepts to real
situations, follow a procedure
1. Knowledge: remember
material; know terms, facts,
procedures, basic concepts
2. Comprehension:
grasp meaning; understand
facts, interpret charts,
translate verbal to math
estimate consequences
3. Application: use
material in new situations;
apply concepts to real
situations, follow a procedure
4. Analysis: break material
into components & understand
structure; recognize logical
fallacies, distinguish fact and
inference, evaluate relevancy of
data
5. Synthesis: integrate parts
to make a new whole, integrate
learning to solve a problem
6. Evaluations: judge logical
consistency, judge whether
conclusions are supported by
facts
4. Analysis: break material
into components & understand
structure; recognize logical
fallacies, distinguish fact and
inference, evaluate relevancy of
data
5. Synthesis: integrate parts
to make a new whole, integrate
learning to solve a problem
6. Evaluations: judge logical
consistency, judge whether
conclusions are supported by
facts
32
Most Frequently Cited Skills of Effective Managers
Most frequently cited skills of effective managers. This
survey is the assessment of more than 500 mid-level
and upper-level managers in about 150 organizations:

01. Verbal communication
(especially the ability to listen and give counsel)
02. Managing time and stress
03. Managing individual decisions
04. Recognizing, defining, and solving problems
05. Motivating and influencing others
06. Delegating
07. Setting goals that are operational


133
Most Frequently Cited Skills of Effective Managers
08. Self-awareness
09. Team building
10. Managing conflict
11. Ability to give a formal presentation
12. Patience and respect toward others
13. Analytical abilities and technical competence
14. Hard work and enthusiasm
15. Skills for integrating specialized knowledge
16. Ability to write effective reports
17. Knowledge of business and strategic planning
18. Tolerance and adaptability to change




134
2
CHAPTER
McGraw-Hill/Irwin
Copyright 2013 by TheMcGraw-Hill Companies, I nc. All rights reserved.
The Strategic
Management Process
236
.
Part 1 Strategy Analysis
2-36
ChapterCase 2 Teach For America: Inspiring Future Leaders
TFA Mission: Eliminate educational inequality
Started by an undergraduate student
Inspiring mission
Provide a meaningful service option for bright young people
Make teaching to the neediest high prestige
Over 40,000 applicants for 4,500 jobs
TFA Video
2-37
Teach For America Inspiring Others
What are the key issues in the opening case?
How was TFA able to successfully recruit?
Established an inspiring mission
Appealing to the target demographic
Clear communication of the goals of the organization
The program is highly selective
2-38
VISION, MISSION, AND VALUES
What is forming strategic intent?
Staking out a desired leadership position in the long
term that far exceeds a company's current situation

Often used in Japanese corporate settings
Canon will "beat Xerox"

Effective use of stretch goals
Competitive advantage for tomorrow
Example: JFKs Call for Manned Flights

2-39
140
STRATEGY HIGHLIGHT 2.1
Winning Through Strategic
Intent: The Pocketable Radio
Small Japanese Company after WWII
Invented an electric rice cooker
Wanted to license the transistor from Bell Labs in U.S.
Japanese Government & Bell Labs both said NO
Persisted with request Finally,1953 got transistor!
Beat Bell Labs to pocket-sized radio
1957 Launched worlds FIRST pocket radio
1958 Changed company name to.
SONY
2-40
VISION, MISSION, AND VALUES
CUSTOMER-ORIENTED MISSIONS
Define the firm in terms of solutions for customers
Disney: "Make People Happy"
Enhanced strategic flexibility
NOT the same as listening to customers

PRODUCT-ORIENTED MISSIONS
Define the firm in terms of products or services
U.S. Railroads: "Safest N. American railroad
Missed the chance to move into delivery before
UPS & Federal Express

2-41
Mission Statements & CA
Intel Corp. In search of a mission
From product orientation
To be the pre-eminent building block supplier of the PC industry
To be the pre-eminent building block supplier of the Internet economy
To customer orientation
Delight our customers, employees, and shareholders by relentlessly delivering the platform
and technology advancements that become essential to the way we work and live
What is the link between a firms mission statement and competitive
advantage?
2-42
LO 2-1 Explain the role of vision, mission, and values in the strategic
management process.
LO 2-2 Describe and evaluate the role of strategic intent in achieving
long-term goals.
LO 2-3 Distinguish between customer-oriented and product-oriented
missions and identify strategic implications.
LO 2-4 Critically evaluate the relationship between mission statements
and competitive advantage.
LO 2-5 Explain why anchoring a firm in ethical values is essential for long
term success.
LO 2-6 Compare and contrast strategic planning, scenario
planning, and strategy as planned emergence, and discuss
strategic implications.

2-43
The Strategic Management Process
1. Strategic Planning

2. Scenario Planning

3. Strategy as Planned Emergence

2-44
Strategy as Strategic Planning
Top-down rational planning
Define mission, vision, & goal (strategic intent)
External analysis of opportunities and threats
Internal analysis of strengths and weaknesses
Create strategic fit through SWOT
Formulate appropriate strategy
Implement chosen strategy
Monitor performance & modify if necessary

2-45
Strategic Planning
Traditional view of strategy
Works reasonably well in stable environment
Scientific management
Strategy is an engineering programming problem
Past predicts the future
Strategic thinking is separated from implementation

2-46
Strategy as Scenario Planning
Scenario planning
Envision different "what-if" plans
Generates a dominant plan
Must implement the most probable option
Keeps other scenarios in the event of changes
"Arab Spring" impact on the oil industry?
Good example of the AFI framework
2-47
Scenario Planning
The future cannot be known
Some examples:
UPS, FedEx, AirTran, Delta
How to compete if the barrel of oil costs $35 or $200?
Boeing, Harley-Davidson, Caterpillar
How to compete if 1 euro = $2 or $1 = 75 yen
How to obtain capital when the DJIA is at 6,800 and the credit markets
are frozen up?
Thinking outside the box
But tendency is not to think about pessimistic scenarios

2-48
STRATEGY HIGHLIGHT 2.2
Shells Future Scenarios
Petroleum industry use of scenario planning
Shell made right move in the 1960s
Again in the 1980s (Communism might fall )
Now projecting 20% energy from renewables by 2025
2-49
Small Group Exercise #2 Global Trends 2025
Consider the above lists as a starting point
What implications would these possible futures have
If your group is (1&4) Ford, (2&5) GE and (3&6)ExxonMobil
Use scenario planning process What is your dominant plan?
Adapted from Global Trends 2025: A Transformed World. National Intelligence Council, Washington, DC, November 2008.
Relative Certainties Likely Impact Key Uncertainties Potential Consequences
Emergence of a multipolar
world (U.S., China, Russia, EU)
New powerhouses, new rules Energy alternatives by 2025?
Oil and gas producers top out
and plunge
Dispersal of global economic
power
Challenge to Western order
Climate change: When and
Where?
Scarce natural resources
Decreased U.S. power Policy trade-offs Return of Mercantilism? Conflict over resources
Natural resources stretched Inadequate energy replacements
Democracy in China and
Russia?
Chinese nationalism, Russian
stagnation
Rapid population growth Social unrest and state failure Arms race triggered by Iran? Nuclear escalation of conflicts
Conditions rife for conflict
Role of global powers in Middle
East
Stability in the Middle East?
Increased turbulence with
glimmers of hope
Terrorism's appeal may lessen
but capabilities may increase
Global vulnerability to high-
tech terrorism
European Japanese Relations Interculturalism
Cooperation of global powers
with new powerhouses?
Tensions between new and old
orders
2-50
Strategy as Planned Emergence
Strategic Initiative
Google 50% of products from the "20% rule"
Enron wind investment
Mintzberg Planned Emergence
Strategy can come from top or bottom
Some intended strategies drop off in the process
Allows for new emerging ideas to become realized
Resource allocation process (RAP)
Serendipity can have dramatic effects

2-51
Strategic Initiatives and Serendipity
Polaroid
Instant photography
3M
Masking tape
Post-it notes
Scotchguard
Japan Railways
Bottled water
Pfizer
Viagra

2-52
Bottom-up Strategic Initiatives /
Autonomous Actions
Microsoft
Internet Explorer
Xbox
Intel
DRAM exit and entry into semiconductors
Starbucks
Frappuccino
Google
50% of new products come from 20% autonomous time

KEY:
Expect the unexpected, and react to it strategically!
2-53
EXHIBIT 2.3 MINTZBERGS PLANNING FRAMEWORK.
2-54
STRATEGY HIGHLIGHT 2.3
Its Not What We Do!
Starbucks
Autonomous action of mid-level manager
Tenacity and persistence of a store manager
Risk of failure
Possible career-limiting action
Organization must be willing to accept new ideas
Frappuccino was born!
Contributing 20% of revenues for Starbucks recently
2-55
Small Group Exercise # 3 Ideas Bloom
Firms today need to allow more "emergence"
How can firms generate more new ideas?
What if managers got 2% of their budget for investing?
The organization would generate many "seeds"
Experimentation would grow
Firms become network of small angel investors
New ideas would get small funds for initial tests
Application of real options thinking
What are some implementation problems here?
Use a firm someone in your group knows well to
discuss problems with widely spreading small project
approvals across the company.
2-56
Implications for the Strategist
Net Present Value (NPV)
Widely used financial tool
Inappropriate when uncertainty is high
Doesnt capture home run upsides

Real Options
Uses a set of smaller decisions
Keeps options open longer
Prevents early shutdown of projects
Microsoft Keywords (Ch.1 opener)
They may have stayed with it longer
Possibly hit stride on search earlier

2-57
CHAPTERCASE 2 /Consider This
Teach For America is TWENTY years old!

A $200 million dollar organization
Teacher effectiveness improves with
Studentoriented achievement course objectives

What role did TFAs vision statement have?

How have they recruited so many into teaching?

Could it have worked as a for-profit firm?


2-58
Game Theory and Strategy:
Lessons #1

1. Commitment (sunk costs) can be used
to achieve competitive advantage.

Preemption strategy

Note: It is important to communicate the commitment to competitors.
59
Game Theory and Strategy
Lessons #2:

2. Commitment (sunk costs) can be
used to achieve cooperation.

Try to create a situation of mutual economic hostages
The wise manager should think beyond Machiavellis myopic approach to contracting
and should seek both to give and receive credible (sunk cost) commitments that
facilitate ongoing relationships and adaptation.

60
Flexibility vs. Commitment?
Ironically, flexibility requires making commitments.
Strategic flexibility is analogous to having options and
commitment is analogous to the exercise of an option.

The greater the uncertainty the firm faces, the more
valuable are its real options.

The resolution of uncertainty over time
is the catalyst which induces a manager
to make (sunk cost) commitments.
Is uncertainty always resolved?!?

61
Coming up Next Week
Rothaermel Ch. 4
Nucor Case
This is a group case and will take some time.
Coordinate now to get things arranged.
62