Lecture 1 to 6

Strategy is the long-term direction of scope of an organization intended to achieve a sustainable advantage by configuring resources to meet the needs of markets and fulfill stakeholder expectations.

Depends on Strategic Fit:

Coherence and Consistency between the firm’s internal environment (its goals, values, resources, capabilities, and structure) and its external environment (customers, competitors, and market trends). If a strategy does not “fit” the external reality or the internal capacity, it will fail.

Example:

• Good Fit (Madonna): She achieved Strategic Fit by aligning her internal resources (relentless discipline, ambition, and ability to manage partnerships) with the external environment (the rise of MTV and the visual era of pop music)

• Bad Fit (New Coke): Ignored the external environment and focused on the physical product (taste) but ignored the social/cultural environment (the deep emotional attachment customers had to the “classic” brand)

1. Simple, Consistent, Long-term Goals: A single-minded commitment to a clear objective that does not waver over time.

   • Example: General Giap’s ultimate Goal was the Reunification of Vietnam (pursued consistently over decades)

2. Profound Understanding of the Competitive Environment: A deep appreciation of the external “game,” including the competitor’s weaknesses and market dynamics.

   • Example: Giap understood that the US military was superior on the battlefield but politically vulnerable to a long, expensive war at home

3. Objective appraisal of Resources: A realisitc self-awarness of internal strenghts and weaknesses; knowing what the firm can and cannot do.

   • Example: Giap objectively appraised that he could not win a head-on conventional war (weakness), so he utilized his morale and manpower (strenghts) for guerilla warfare.

4. Effective Implementation: The leadership, discipline, and organizational structure required to turn the plan into action.

   • Giap maintained strict logistical discipline to move supplies and troops despite US bombing.

1. Corporate Strategy: Scope of the firm. It answers the question: “Where should we compete?” This involves decisions about industry selection, diversification, vertical intergration, and allocating capital between different business units.

   • Sony decided to sell chemical business and enter the movie industry (changing where it competes).

2. Business Strategy: Competition in a specific market. It answers the question: “How should we compete?” This involves decisions about how to achieve a sustainible competitive advantage (e.g., through low cost or differentiation) over rivals in that specific industry.

   • Sony’s Playstation Division deciding to launch a subscription service to compete specifically against Microsoft Xbox (Deciding how to win in the gaming market).

1. Intended Strategy: The strategy as conceived by the top management team (The Plan)

2. Emergent Strategy: The decisions that bubble up from the bottom of the organization as managers adapt to changing realities (The Adaptation)

3. Realized Strategy: The strategy that actually happens (The Outcome), which is a mix of the Intended Strategy (usually only 10-30%) and the Emergent strategy

1. Introduction: Sales are small, products are unstandardized, and technology is uncertain. Competition focuses on product innovation and features.

2. Growth: Market penetration accelerates as a Dominant Design emerges. This reduces risk, encourages mass production, and shifts competition toward process innovation and scaling up.

3. Maturity: The market becomes saturated (replacement demand only). Technology diffuses, making products commodities. Competition shifts aggressively to Cost Efficiency and market share battles.

4. Decline: Demand shrinks due to technological substitution or changing demographics. Firms must exit (or Divest), harvest, or find a Niche.

• Example: Cellphones (Blackberry -> Dominant Design by Apple -> Commodity, Innovation is incremental, Competition about brand and price -> no forseeable decline (but possible)).

• There are duration variations (e.g., short: consumer electronics, long: railroads) and pattern Variations (never decline or rejuvenation)

Dominant Design is a product architecture that defines the look, functionality, and production method for an industry, becoming the accepted standard. Its emergance marks a critical turning point in the industry life cycle.

• Before Dominant Design: Competition is driven ny Product Innovation (radical experiments with different features/shapes)

• After Dominant Design: The industry coalesces around one standard. Competition shifts to Process Innovation (improving manufacturing efficiency, lowering costs, and incremental refinement). Firms that cannot adopt the dominant design usually exit the market.

• Example: The PC Industry (IBM)

  • Before: Apple II, Commodore 64, and others had totally different operating systems and hardware

  • Dominant Design: The IBM PC (1981). It set the standard (Intel chip + MS-DOS + Open Architecture)

  • Effect: Product innovation slowed (everyone made “PC Clones”), and process innovation (Dell’s supply chain efficiency) became the key to winning

Organizational Inertia is the tendency of mature firms to resist change, making it difficult for them to adapt to new environments or technologies. It stems from four routes:

1. Organizational Routines: Haboits and standard operating procedures (SOPs) make efficiency high but flexibility low. Core capabilities become “core rigidities.”

2. Social/Political Strucutres: Managers resist change because it threatens their exisiting power, status, or budgets.

3. Conformity: Firms imitate each other (isomorphism) to gain legitimacy, reducing the variety of strategic options they consider.

4. Limited Search: Bounded rationality leads managers to look for solutions that are close to what they already know, ignoring radical new technologies.

• Example: Kodak.

  • Routines: They were masters of chemical film manufacturing (efficiency). They could not adapt their routines to digital electronics.

  • Politics: The film division executives held the power and profit. They resisted the digital division because it cannabalized their high-margin film business.

  • Result: Inertia caused them to miss the digital wave despite inventing the digital camera

1. Creating a Perception of Crisis: Artificially generating a sense of urgency or impending doom even if the firm is currently profitable to stop clinging to status quo

   • Example: Jack Welch (GE) “Fix it before it breaks”

2. Establishing Stretch Targets: Setting ambitious performence goals that are impossiblen to reach using current methods to not just work harder but invent new ways of working

   • Example: Toyota goal to cut costs by 30% led to redisgn of car and not just tweaking the old design

3. Corporate-Wide Initiatives: Top-Down programs (like Quality, Innovation, or Sustainability) that span the whole company.

   • Example: Six Sigma (GE) (Every department to adapt to statistical approach to defects)

4. Reorganizing Company Structure: Changing the organizational chart to create new routines and break old power structures.

   • Cisco shifting between centralized and decentralized structures.

5. New Leadership: Hiring a CEO or top executive from outside the company to bring fresh perspective.

   • Example: Disney Michael Eisner

6. Scenario Analysis: Exercise where managers envision multiple different future worlds to break “Groupthink” and make everyone more receptive to change.

   • Shell: Using scenerios before 1970s oil shock, allowing them to react faster

To survive the Life Cycle, firms must achieve Organizational Ambidexterity.

• Simultaneously Exploit existing competencies while Exploring new opportunities. Difficult because the two require different structures and cultures.

• Example: Amazon

  • Exploit: Relentlessly optimizing its e-commerce warehouse efficiency (Maturity Logic).

  • Explore: Simultaneously investing in AWS and Prime Video.

Profitability of Innovation depends on the Regime of Appropriability, which determines how value is distributed between the innovator, competitors, and customers. It is influenced by four key factors:

1. Property rights: Strong intellectual property rights (IP) protection (patents, copyrights) creates a strong regime.

2. Tacitness & Complexity: If technology is codified (written down, explicit knowledge), it is easy to copy. If it is tacit (know-how), it is hard to copy.

3. Lead Time: The temporary monopoly an innovator enjoys before imitators catch up.

4. Complementary Resources: The diverse assets needed to commercialize the innovation (distribution, brand, manufactoring). If these are specialized and held by others, the innovator loses value to the owners of these assets.

• Example:

  • Strong regime (Innovator wins): Pfizer (Viagra). Strong patent protection + manufactoring capabilities allowed Pfizer to capture almost all the value.

  • Weak rgime (Innovator loses): EMI (CAT Scanner). EMI invented the scanner but lacked the Complementary Resources (hospital distribution/training). GE and Siemens, who had these resources, reverse-engineered the scanner (weak IP) and captured the market

• Many digital and technology industries, demand is driven by Network Externalities, where the value of a product increases with the number of users.

• This leads to Tipping Points. Once a standard reaches a critical mass, the market "tips" toward it, creating a "Winner-Take-All" or "Winner-Take-Most" market.

• Winning Standards War requires your establishment of a Dominant Design. Strategies Include:

  1. Pre-emption: Entering early to build an installed base.

  2. Penetration Pricing: Selling cheap (or free) to grow the user base quickly.

  3. Alliances: Rallying complementors (e.g., software developers) to your platform.

• Example: Betamax (superior but higher cost) vs. VHS (Licenced the Standard)

• Licensing: Low risk, low return. Best when the firm lacks complementary resources (e.g., manufactoring, marketing) or when the innovation has many applications.

• Outsourcing: Buying specific functions (e.g., manufacturing) while keeoing control of design/marketing.

• Strategic Allience/Joint Venture: Sharing risk and resources with a partner. Good when you need a specific asset (e.g., access to a foreign market).

• Internal Commercialization (Wholly Owned Subsidiary): High risk, high return. Requires the firm to own all necessary complementary resources. Best when the firm wants to protect tacit knowledge or build long-term capability.

• Example: Dolby vs. Google

  • Dolby (Licensing): Dolby Labs invents sound technologies but doesn’t make radios or stereos. It licenses the tech to manufacurers (Sony, Bose) because it lacks the manufacturing scale.

  • Google (Internal): Google developed its search algorithm and commercialized it internally (building its own servers and ad platform) because it had the resources and wanted full control over the user experience.

• First mover Advantages: You can set the standard, secure scarce resources (patents, location), and build early brand loyalty

• Follower Advantage: You avoid “pioneering costs” (educating the market, R&D mistakes), can optimize the product based on the pioneer’s errors, and utilize newer/cheaper technology

• Decision Rule: Be a first mover if the "Regime of Appropriability" is strong (patents protect you) or if you can build a standard. Be a follower if technology is moving fast and patents are weak.

1. Example: Jet Engines vs. Personal Computers.

   • Jet Engines (First Mover): The technology evolved slowly and was patent-protected. De Havilland (Comet) failed due to design flaws, but Boeing (707) succeeded by moving early enough to set the standard design.

   • Personal Computers (Follower): Apple was a pioneer, but IBM was a follower. IBM waited, saw what the market wanted, and then launched the PC, which dominated the market because they had the complementary resources (sales force/brand) to scale up faster than Apple.

• Big shift from growth to maturity

• Technology diffuses and products become standardized, opportunities for differentiation diminish, and customers become more knowledgeable and price-sensitive.

• Primary Key Success Facor becomes Cost Advantage and firms must focus on these three operational pillars:

  1. Cost Efficiency: Achieving economies of scale, securing low-cost inputs, and drastically reducing overheads

  2. Segment Selection: Avoiding the “commodity trap” by targeting specific customer segments that are less price-sensitive or have distinct needs

  3. The Quest for Differentiation: Trying to differentiate not through the product itseld (which is standard), but through complementary services (image, after-sales support, financing)

• Example: The Airlines Industry (US Legacy Carriers)

  • Maturity: Flying is a commodity; a seat on Delta is physically identical to aseat on United

  • Strategy: They compete aggressively on Cost (cutting meals, baggage fees) but try to differentiate via Service/Loyalty (Frequent Flye programs, Airport Lounges) to hold onto high-value business travelers.

Strategy implementation in mature industries requires a structure that supports routine, efficiency, and standardization. Unlike the organic, flexible structure needed for innovation, mature firms thrive on Mechanic Structures

• Standardization: Detailed standard operating procedures (SOPs) for every task to ensure consistency and speed

• Centralization: Controls are tight; decision-making a centralized to monitor costs strictly

• Culture: The culture emphasizes operational excellence and frugality rather than creativity and innovation

• Example: Mcdonald's

  • Industralization of service (strict standards and rigorous portion control)

When an industry enters the decline phase, firms must choose a strategy based on their Competitive Strenght and the Industry Structure (barriers to exit). There are four strategic options:

1. Leadership: Aggressively seizing market share (acquiring rivals) to become the dominant remaining player in a shrinking market. (Best for strong firms).

2. Niche: Identifying a specific segment that is stable or decaying slowly and focusing only on that. (Best for firms with specific strenghts).

3. Harvest: Maximizing short-term cash flow by halting investment, raising prices, and cutting costs, effectively “milking” the asset. (Best for firms wishing to exit slowly).

4. Divest: Selling the business early before the decline destroys asset value. (Best for weak firms or when exit barriers are low).

Competitive Advantage is created by change, which emerges from two primary sources:

1. External Change: When PESTEL environment shifts (e.g., new regulations, changing prices, technology), some firms are better positioned to exploit it than others. Success depends on Entrepreneurial Responsiveness - the ability to anticipate chamges or react quickly (Agility) to them.

2. Internal Change (Strategic Innovation): When a firm proactively changes the rules of the game rather than just reacting. (New Business models)

• Example:

  • External Source: Toyota. When the 1970s oil crisis hit (external shock), Toyota had a competitive advantage because it already made small, fuel-efficient cars, wheares US manufactorers (GM/Ford) were stuck with gas-guzzlers.

  • Internal Source: Southwest Airlines. They created an advantage internally by inventing the “Low-Cost Carrier” business model (no meals, point-to-point flights, one plane type), distrupting the entire industry

Once established, profit attracts imitation. To sustain an advantage, a firm must build Isolating Mechanisms that prevent rivals from copying its strategy. Imitation requires a rival to pass four specific hurdles:

1. Identification: Obscure superior performance so rivals don’t know you are profitable (e.g., be a private company)

2. Incentive: Deter rivals from trying (e.g., threaten a price war or signal that the market is too small)

3. Diagnosis: Create Casual Ambiguity so rivals can’t figure out why you are successfull (Is it the culture? the process? the Leadership?)

4. Resource Acquisition: Make resources Immobile or hard to buy (e.g., brand loyalty, unique location, or complex team routines)

• Example: IKEA

  • Diagnosis Barrier: It is easy to see what IKEA does (flat packs, big blue stores), but hard to understand the complex logistics and culture that allow them to do it so cheaply (Casual Ambiguity)

  • Acquisition Barrier: Rival cannot simply “buy” IKEA’s supply chain relationships or its frugal corporate culture (Immobility)

Competing on Cost Leadership means managing specific “drivers” that determine unit costs.

1. Economies of Scale: Spreading fixed costs over a large volume (essential in auto/aerospace)

2. Economies of Learning: Reducing costs through accumulated experience and practice over time (the “Learning Curve”)

3. Process Technology: Using superior machines or automation (e.g., robotics) to lower variable costs.

4. Product Design: Designing products for “manufacturability” (e.g., standardizing parts across models)

5. Capacity Utilization: Ensuring factories run at full capacity to avoid paying for idle time

• Example: Ryanair

  • Scale: They fly a massive fleet of identical planes (Boeing 737s), giving them buying power for parts.

  • Capacity Utilization: They have the fastest “turnaround times” in the industry (25 mins), keeping planes in the air (earning money) rather than on the ground.

  • Product Design: They "de-featured" the product (no reclining seats, no seat pockets) to reduce weight/fuel and cleaning costs.

Differentiation Advatage occurs when a firm provides something unique that is valuable to buyers beyond simply offering a low price. It allows the firm to command a price premium. Differentation is not just about the product’s physical features; it extends to the entire relationship between the firm and the customer.

• Tangible Differentiation: Relates to the observable characteristics of a product or service, such as size, shape, color, weight, design, and performance. These are objective and measurable.

• Intangible Differentiation: Relates to the unobservable and subjective value a customer perceives, such as status, exclusivity, individuality, and security. In mature industries where products are technically similar (e.g., bottled water or cosmetics), intangible differentiation becomes the primary driver of value.

• Example: Harley-Davidson

  • Tangable: The distinct sound of the engine and the heavyweight design.

  • Intangible: The brand represents “freedom” and “rebellion”. Customers don’t just buy a motorcycle; they buy membership into a lifestyle and community. This intangible value allows Harley to charge a massive premium over technically superior Japanese bikes.

• Demand Side (Understanding the Customer): The firm must identify the attributes customers value most. Techniques like Multidimensional Scaling (MDS) map customer perceptions to finde gaps in the market (e.g., is there a demand for a painkiller that is both “effective” and “gentile”?). It also involves understanding social and psychological needs (Maslow’s hierarchy).

• Supply Side (The Value Chain): The firm must identify the Drivers of Uniqueness within its internal activities. Differentiation is rarely created by just one department (like Marketing). It requires Product Integrity - consistency across the entire value chain, from sourcing high-quality raw materials to exceptional after-sales service

• Example: Starbucks

  • Demand Side: They realized customers didn’t just want coffee; they wanted a “Third Place” (between home and work) to socialize and relax.

  • Supply side: They didn’t just advertise. They differentiated the entire value chain: sourcing ethical beans (Inbound Logistics), training baristas to be friendly (Operations), and designing cozy store interiors (Service).

Sustaining a differentiatio advantage is difficult for Experience Goods (products where quality is hard to judge before buying, like medical services, wine, or used cars). This creates The Lemons Problem (Information Asymmetry):

1. The Problem: Because buyers can’t tell high quality (“Peaches”) from low quality (“Lemons”), they are willing to pay an average price. High-quality firms cannot cover their costs at this average price and leave the market, leaving only “Lemons” behind.

2. Solution (Signaling): To stay in the market and charge a premium, high-quality firms must send a Signal. A credible signal must be too expensive for a low-quality firm to mimic. Common signals include expensive Branding (sunk cost advertising) and Warranties.

• Example Kia/Hyuandai (The Warranty Signal).

  • In the early 2000s, Korean cars were perceived as low quality (“Lemons”). To change this, they offered a 10-Year Warranty

  • Why it worked: A manufacturer of bad cars could not afford to offer a 10-year warranty because the repair costs would bankrupt them. Therefore. the warranty was a credible signal of improved quality, allowing them to differentiate and raise prices.