Week 8

1. The battle of Cannae (Bow)

   -> Business strategy “war without bullets” fought one sale at a time (Phil Knight, founder of Nike)

2. Lost soldiers in the Alps (Map of the Pyrenees)

   -> A successful strategy is one that committed people infuse with energy: they make it good by making it real (Mintzberg)

Historically, industries have varied markedly in terms of average profitability

But there is also plenty of variance in profitability to be found within industries too

Why do firms in the same industry vary systematically in terms of performance over time?

Richard Rumelt (Rebecca’s favorite author on strategy)

-Good strategy / Bad strategy

-Being good at what you do is far more important than the industry you are in (resource-based view on strategy)

Bad strategy is not just the absence of strategy

Four major hallmarks of bad strategy:

1. Fluff – the superficial restatement of the obvious combined with a generous sprinkling of buzzwords

2. Failure to face the challenge – when you cannot define the challenge, you cannot evaluate a strategy or improve it

3. Mistaking goals for strategy - strategy is not just a statement of desire – not just what but how

4. Bad strategic objectives – strategic objectives are bad when they fail to address critical issues or when they are impracticable (“Dog’s dinner objectives” and “Blue-Sky objectives”)

Microsoft’s 2013 mission statement:

“To create a family of devices and services for individuals and businesses that empower people around the globe at home, at work and on the go, for the activities they value most.”

2021: To empower every person and every organisation on the planet to achieve more.

That statement will be enduring because it doesn’t really say anything about what Microsoft does or hopes to do.

Many mission statements signal an aristocratic lack of concern with the grubby business of making money:

2012 Facebook: “Making the world more open and connected.

Today it is: Give people the power to build community and bring the world close together.”

Other firms simply say that their mission is to maximise shareholder value:

2018 Dean Foods: “The Company’s primary objective is to maximise long term stockholder values, while adhering to the laws of jurisdiction in which it operates and at all times observing the highest ethical standards.”

(One year later the company went bankrupt)

-> Better to have a “motto” – a maxim that evokes emotion and a sense of commitment

There is no substitute

Semper Fi

Diamonds are Forever

Think Different

Just Do It

Rerum cognoscere causus

The problem may be internal. “The organisation’s competitive problems may be much lighter than the obstacles imposed by its own outdated routines, bureaucracy, pools of entrenched interests, lack of cooperation across units, and plain-old bad management” (Rumelt, 2011. p.78)

1. Because making a choice (between competing values and groups) is painful

2. Because it is easier to just come up with template filling fluff i.e., talk of vision, mission values

3. Because people fall pray to “New Thought” (a quasi-mystical belief in the power of positive thinking)

The idea that “by thinking only of success you can become a success, [is a form] of psychosis and cannot be recommended as approaches to management or strategy” (Rumelt, 2011. p.76)

(We will return to this idea next week when we discuss process approaches…)

1. The vision: Fill in your unique vison of what the school should be in the future (popular are to “be the best” or the “leading” or “best known”)

2. The mission: Fill in a high-sounding politically correct statement (Dow’s mission is “To passionately innovate what is essential to human progress by providing sustainable solutions to our customer”)

3. The values: Fill in a statement describing the company’s values – make sure they are not controversial (Enron’s were “Respect, Integrity, Communication and Excellence”)

4. The Strategies: Fill in some aspirational goals but call them strategies (and add “long-term” on the end, so no one actually has to do any of it)

Design Principle:

Engineer a “fit” between the organisation and environment

SWOT Analysis:

PESTLE Analysis:

Strategic planning at General Electric

“The essence of formulating competitive strategy* is relating a company to its environment. Although the relevant environment is very broad, encompassing social as well as economic forces, the key aspect of the firm’s environment is the industry or industries in which it competes.”

* Key = competitive advantage

Porter, 1979

The Structure Conduct Performance (SCP) model, was first described by economists Edward Chamberlin and Joan Robinson in 1933, and subsequently developed by the pioneering work of the Harvard economist Edward Mason, in the 1930s, as well as his doctoral student Joseph Bain, in the 1950s (hence the “Bain-Mason” model). 

SCP model: about how to make industries more competitive

Five forces model: how to insulate your firm from competition

“The lesson for entrepreneurs is clear: If you want to create and capture lasting value, don’t build an undifferentiated commodity business.” (Thiel, 2014)

Will be affected (reduced) by:

-Supply side economies of scale

-Demand side benefits of scale (i.e. network effects, trust)

-Customer switching costs

-Capital requirements (but important not to overstate)

-Incumbency advantages independent of size (e.g. brand, experience, pre-emption of favorable locations)

-Unequal access to distribution channels

-Restrictive government policy (for example licensing taxis)

-Finally, Porter notes how potential entrants believe incumbents may react will influence their decision (Amazon)

Powerful suppliers can squeeze profitability out of an industry that is unable to pass on cost increases to its customers.

Organizations have more power to set price when:

-Supplier’s input is a commodity

-Supplier’s input is inessential to your output

-You comprise a large proportion of supplier’s sales

-Supplier has many competitors

-Supplier has few other customers

-Buyer has low switching costs

-Buyer has substitute products available

-Buyer can integrate backward

Powerful customers can force down prices.

Organizations have more power over customers when:

-Their product/service is differentiated, unique

-Their product/service is essential to buyers

-Buyers have high switching costs

Buyers tend to be more price sensitive if:

-They have less money

-Product represents a significant part of their budget

-Quality of product not hugely significant

Your product (service) is vulnerable to substitution when:

-Alternative products or services deliver either:

(a) Comparable benefits at lower cost; or

(b) Fewer benefits at significantly lower cost

-New technology can make you obsolete

-Customers have low switching costs

-Doing without is also a substitute – bottled water?

Here all of the previous factors converge (peaceful diplomacy v active warfare)

Intensity of rivalry among competing firms is intensified by:

-Low industry growth

-Competitors are numerous or roughly equal in size

-Commodity products & services

-Low brand loyalty

-Low switching costs

-Excess capacity

-High exit barriers

Porter notes that it is not just the intensity of competition that matters, but the basis (price v needs of customers)

Strategy as a set of trade-offs: “Stuck in the middle” is not a stable, viable market position (according to Porter)

All strategies for Porter boil down to two very broad options: 

-Do what everyone else is doing (but spend less money doing it)

-Do something no one else can do

Be cheap or be different

FLASHCARD: Shortcomings of Porter's Generic Strategies

Context: Porter (1985) argues firms must choose: be cheap OR be different. "Stuck in the middle" = failure.

Key Point (Mintzberg): Porter's framework is "not wrong – but partial!" (captures some reality but incomplete)

Main Shortcomings:

1. Empirical Evidence Contradicts "Stuck in the Middle"

• Many successful firms combine low cost AND differentiation

• Example: Toyota, IKEA, Southwest Airlines

• Not always a trade-off in practice

2. Too Simplistic/Binary

• Only 2 dimensions of competition

• Real competitive advantage more complex

• Ignores other sources (speed, flexibility, innovation)

3. Static View

• Assumes stable competitive positions

• Doesn't account for dynamic markets

• Mintzberg critique: strategy emerges, not just planned positioning

4. Ignores Internal Capabilities (RBV Critique)

• Focuses on external positioning (where to compete)

• Ignores firm resources and capabilities (how to compete)

• Rumelt showed: firm-level factors > industry positioning

5. False Dichotomy

• Cost and differentiation can be complementary

• Process improvements can reduce cost AND improve quality

• Example: Manufacturing excellence does both

6. Assumes Markets Are Fixed

• Doesn't account for market creation

• Blue Ocean Strategy challenge: create new market space

• Innovation can transcend the trade-off

Core Critique: Partial, not complete. Porter assumes fixed trade-offs and industry-level positioning determines success. RBV and Process Schools show: internal capabilities and dynamic adaptation matter more.

Porter says: Choose your position (cost OR differentiation)

Critics say: Build distinctive capabilities that may enable both; strategy emerges from organizational learning

Use for: Critiques of Classical/Positioning School; Links to RBV and Mintzberg

Mintzberg identified three “basic premises” of the classical school:

1. That strategy formation should be a controlled conscious process of thought which derives directly from the notion of rational economic man.

2. That responsibility for control and consciousness must rest with the chief executive officer.

3. That implementation is a distinct phase which comes after the earlier phase of explicit and conscious formulation.

Not wrong – but partial!

Sources: Whittington (2000) Mintzberg (1994)“The fall and rise of strategic planning” HBR, January-February edition

Chandler (1962)

“This was the fundamental strategic error. Long-term commercial success in fact depended on achieving sales volumes at least equal to those of the Japanese … The long-term result of the Japanese industry’s historic focus on market share and volume, often at the expense of profitability, has been … high and secure profitability.”

BCG, Strategy Alternatives for the British Motorcycle Industry, 1975

“In truth, we had no strategy other than the idea of seeing if we could sell something in the United States. It was a nice frontier, a new challenge, and it fitted the “success at all odds” culture that Mr Honda had cultivated …

“Throughout our first eight months, we had not attempted to move the 50cc Supercubs … They seemed wholly unsuitable for the US market where everything was bigger and more luxurious.

“We used the 50ccs ourselves to ride around LA on errands. They attracted a lot of attention. One day we had a call from a Sears buyer… But we still hesitated to push the 50cc bikes out of fear they might damage our image in a heavily ‘macho’ market. But when the larger bikes started breaking, we had no choice. We let the 50cc bikes move. And surprisingly, the retailers who wanted to sell them weren’t motorcycle dealers, they were sporting goods stores.”

-Classical perspectives on strategy are rooted in economics: the firm as a rational actor (ignores agency issues)

-Strategy as positioning – how not to compete (differentiation)

-Implies oligopolistic competition (availability of rents)

-Dominant concern in strategy is profit maximisation (securing those rents)