What is strategy?
And why does strategy matter?
Examples of Strategy
The battle of Cannae (Bow)
-> Business strategy “war without bullets” fought one sale at a time (Phil Knight, founder of Nike)
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)
Strategy and Profitability in Industries
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
The fundamental question in business strategy
Why do firms in the same industry vary systematically in terms of performance over time?
RIchard Rumelt (1982 & 1991)
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)
What is Bad Strategy? (Four major hallmarks)
Bad strategy is not just the absence of strategy
Four major hallmarks of bad strategy:
Fluff – the superficial restatement of the obvious combined with a generous sprinkling of buzzwords
Failure to face the challenge – when you cannot define the challenge, you cannot evaluate a strategy or improve it
Mistaking goals for strategy - strategy is not just a statement of desire – not just what but how
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”)
Mission statements ≠ strategy
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
Why so much Bad Strategy? (Rumelt, 2011)
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)
Because making a choice (between competing values and groups) is painful
Because it is easier to just come up with template filling fluff i.e., talk of vision, mission values
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…)
A template for bad strategy: Think of a strategy for LSE
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”)
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”)
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”)
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)
Timeline of strategy discipline
The design school (SWOT & PESTLE Analysis)
Design Principle:
Engineer a “fit” between the organisation and environment
SWOT Analysis:
PESTLE Analysis:
The planning school
Strategic planning at General Electric
Planning’s unplanned troubles?
Porter: competitive strategy as primarily a function of industry position
“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
Origins of Porter’s 5 forces model – the SCP model
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
Porter 1.0 – “The five forces that shape industry 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)
Force 1: Threat of new entrants
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)
Force 2: The power of suppliers
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
Force 3: The power of buyers
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
Force 4: Threat of substitutes
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?
Force 5: Competitive rivalry
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)
Star plot of industry structure
Generic Strategies (Competitive Advantage / Competitive Scope)
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
What are the shortcomings of this approach?
Mintzberg?
Mintzberg’s critique of the Classical school
Mintzberg identified three “basic premises” of the classical school:
That strategy formation should be a controlled conscious process of thought which derives directly from the notion of rational economic man.
That responsibility for control and consciousness must rest with the chief executive officer.
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
Deliberate versus emergent strategy
Deliberate vs. Emergent strategy (A planning view of strategy formation)
Deliberate vs. Emergence (An emergent view of strategy formation)
A famous example: Planning v emergence?
Japanese vs. British motrocycles in America
The Boston Consulting Group’s analysis
“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
Honda’s success
Kihachiro Kawashima’s account
“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.”
Summary
-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)
Zuletzt geändertvor einem Monat