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Welcome to

Business Policy & AdminBusiness Policy & Admin

MGS 5010

Dr. Joseph McGill

Kean U - Willis 403E908 737 4166 (O)

jmcgill@kean.edu

turbo.kean.edu/~jmcgill

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• Firm-level view – Integrative - crosses internal functions/units

– Fit – the firm in its environment

– LT performance

– LT (~irreversible) resource commitments

Business Strategy

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Business Strategy antecedents

• Ancient Greece - military term Στρατηγικός: the army’s leader

• von Clausewitz – strategy is emergent• Strategy appears in both business and

military fields in mid-19th century America. • West Point graduates implemented what they

learned: – in the Civil War (developed the Staff Office)– in business in the 1850s

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– Why is it that some firms perform well over time relative to competitors, while other firms fail?

– Who are the stakeholders relative to firm performance (e.g., managers, owners, investors, employees, customers, suppliers, …)?

– What drives business performance (value creation)?

• We will learn to apply strategic management “toolkits” to identify issues, evaluate alternatives, and choose & implement actions.

Business Strategy questions

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Business Strategy

• 1959 – Ford foundation report on business schools > reform the curriculum!

• Apply analytical models, e.g., game theory.

• Move beyond neoclassical economics

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Industry

Quantity of Corn in Millions of Bushels

83

(b)

$1.87

Pri

cepe

rB

ushe

l

S2

M

S2 D

D

(2,075 firms)

Industry

Quantity of Corn in Millions of Bushels

83

(b)

$1.87

Pri

cepe

rB

ushe

l

S2

M

S2 D

D

(2,075 firms)

Neoclassical economics Neoclassical economics LONGLONG--RUN EQUILIBRIUM RUN EQUILIBRIUM -- FIRM AND INDUSTRYFIRM AND INDUSTRY

Quantity of Corn in Thousands of Bushels

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(a)

$1.87

Pri

cepe

rB

ushe

l

D2

MCFirm

AC

m

Quantity of Corn in Thousands of Bushels

40

(a)

$1.87

Pri

cepe

rB

ushe

l

D2

MCFirm

AC

m

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The FactsAnalysis of 8,000 US businesses 81-97:• 19% sustained high performers. • 20% chronic under-performers.• 41% steady moderate performers. • 10% declining performers. • 10% improving performers.

McGahan,California management review, 1999

• NB Recent McKinsey research notes that sustainable success is now rarer than 20%.

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Industry profitability 1987-1996

Source: Hawawini, Subramanian, & Verdin. Strategic Management Journal (2003)

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Why are there performance differences among firms?

• Concentration of market power, monopoly positions ? (Bain)

• Opportunistic innovation? (Schumpeter)

• Efficiency through vertical integration?

• Efficiency through control of transaction costs? (Williamson)

• Capability to learn & adapt continuously

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Drivers of performance (brief version)

• Desire - some firms seek dominance (e.g. Newscorp, WalMart, Canon, Dell, Sony)– National competition - firms may be protected

from the forces of competition (‘national champions’ for example)

• Ability– To identify a valuable opportunity. – To innovate & protect the innovation (others see

it and are attracted by first mover success). – To leverage firm-specific capabilities and

resources.

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Alaska Gold Mine(You have 14 days)

Option Min Time Max Time OutcomePersonal

Risk#1 (wait 3-4 weeks)

#2 (over top)

#3 (valley)

#4 (wait 3 days)

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Alaska Gold Mine(You have 14 days)

Option Min Time Max Time OutcomePersonal

Risk#1 (wait 3-4 weeks)

No $$$ None

#2 (over top)

#3 (valley)

#4 (wait 3 days)

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Alaska Gold Mine(You have 14 days)

Option Min Time Max Time OutcomePersonal

Risk#1 (wait 3-4 weeks)

No $$$s None

#2 (over top)

7 days 10 days For sure$$$s

Life

#3 (valley)

#4 (wait 3 days)

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Alaska Gold Mine(You have 14 days)

Option Min Time Max Time OutcomePersonal

Risk

#1 (wait 3-4 weeks)

No $$$s None

#2 (over top)

7 days 10 days For sure$$$s

Life

#3 (valley)

14 days 21 days Maybe$$$s

None

#4 (wait 3 days)

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Alaska Gold Mine(You have 14 days)

#3 (valley)

14 days 21 days Maybe$$$s

None

#4 (wait 3 days)

10-13 daysto top

17-24 daysto valley

Yes, if topLose, if storm

None

Option Min Time Max Time OutcomePersonal

Risk

#1(wait 3-4 weeks)

No $$$s None

#2(over top)

7 days 10 days For sure$$$s

Life

#3(valley)

14 days 21 days Maybe$$$s

None

#4(wait 3 days)

10-13 daysto top

17-24 daysto valley

Yes, if topLose, if storm

None

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The Alaska Gold Mine(You have 14 days)

(wait 3 days)to top to valley Lose, if storm None

#5 What if walk for 3 days?

IF STORM Keep walking, same as option #3IF NO STORM Turn back (total 6 days) + over top (7-10 days) 13 - 16 days

Option Min Time Max Time OutcomePersonal

Risk

#1(wait 3-4 weeks)

No $$$s None

#2(over top)

7 days 10 days For sure$$$s

Life

#3(valley)

14 days 21 days Maybe$$$s

None

#4(wait 3 days)

10-13 daysto top

17-24 daysto valley

Yes, if topLose, if storm None

#5 What if walk for 3 days?

IF STORM Keep walking, same as option #3IF NO STORM Turn back (total 6 days) + over top (7-10 days) 13 - 16 days

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The Environment -“Threats & OpportunitiesThreats & Opportunities”

Management’s values & attitude toward risk

Organization’s capabilities -““Strengths & Weaknesses”Strengths & Weaknesses”

STRATEGY

GOAL

Strategy Formulation

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The Environment -“Threats & Opportunities”

Management’s values & attitude toward risk

Organization’s capabilities -“Strengths & Weaknesses”

STRATEGY

GOAL

Strategic Management Process

Performance

Execution/Implementation

Control

Feedback

Comm

unicatio

n

Monitor & Measure

Formulation Implementation

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More specifically …StrategyStrategy consists of organization-wide commitments and actions required for a firm to exploit its competencies, gain competitive advantage, and earn above-average returns

*commitments - long term (irreversible) commitments

*actions - involving substantial creation, acquisition, or redeployment of resources

*competitive advantage(s) – competitors are unable to copy/imitate

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Terms

Returns equal to those an investor expects to earn from other investments with a similar amount of risk

Average (or “accounting”) returns

Returns from firm-specific strategies that

competitors are not simultaneously implementing

Above-Average (or “economic”) returns

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Limited sources of value creation

• Strategies• Structures/business models• Products/processes• Resource/capability creation• Resource/capability combination• New marketsBut …good business ideas are hard to

find!

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Fundamental nature of competition is

changing

Competitive Landscape

Hypercompetition

Dynamics of strategic maneuvering among global and innovative combatants

Price-quality positioning, new know-how, first mover

Protect or invade established product or geographic markets

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Fundamental nature of competition is

changing

Hypercompetitive Hypercompetitive environmentsenvironments

Competitive Landscape

Emergence of global

economy

Goods, services, people, skills, and ideas move freely across geographic borders.Spread of economic innovations around the world.

Political and cultural adjustments are required.

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Fundamental nature of competition is

changing

Hypercompetitive Hypercompetitive environmentsenvironments

Competitive Landscape

Emergence of global

economy

Rapid technological

change

Increasing rate of technological change and diffusion

The information age

Increasing knowledge intensity

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Strategic flexibility?

How can a firm develop dynamic capabilities in response to perpetually turbulent and uncertain competitive environments?

Can firms change? (i.e., success breeds failure)?

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StrategicFlexibilityStrategic

Flexibility

Strategic Flexibility

StrategicStrategicflexibilityflexibility

StrategicStrategicreorientationreorientation

Capacity toCapacity tolearnlearn

OrganizationalOrganizationalslackslack

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1. Strategy dictated by the external environments of the firm (what opportunities exist in these environments?)

2. Firm develops internal skills required by external environment (what can the firm do about the opportunities?)

GeneralGeneral

EnvironmentEnvironment

GlobalGlobal

TechnologicalTechnological

Eco

nom

ic

Eco

nom

ic

Socio

cultu

ral

Socio

cultu

ral

Politi

cal/Le

gal

Politi

cal/Le

gal D

em

ogra

phic

Dem

ogra

phic

1. External Environments

Industry Environment

Competitor Environment

I/O Model of Above-Average Returns

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Four Assumptions of the I/O Model

1.External environment creates pressures and constraints that determine the strategies that would result in above-average returns (deterministic)

2.Most firms competing within a particular segment are assumed to control similar strategically relevant resources and to pursue similar strategies in light of those resources

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Four Assumptions of the I/O Model

3.Resources used to implement strategies are highly mobile across firms

4.Organizational decision makers are assumed to be rational and committed to acting in the firm’s best interests, as shown by their profit-maximizing behaviors

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Industrial Organization

Model

I/O Model of Above-Average Returns

1. Study the external environment, especially the industry environment•economies of scale•barriers to market

entry•diversification•product

differentiation•degree of

concentration of firms in the industry

The External Environment

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I/O Model of Above-Average Returns

2. Locate an attractive industry with a high potential for above-average returns

Attractive industry: one whose structural characteristics suggest above-average returns

Industrial Organization

ModelThe External Environment

An Attractive Industry

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I/O Model of Above-Average Returns

3. Identify the strategy called for by the attractive industry to earn above-average returns

Strategy formulation: selection of a strategy linked with above-average returns in a particular industry

Industrial Organization

ModelThe External Environment

An Attractive Industry

Strategy Formulation

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I/O Model of Above-Average Returns

4. Develop or acquire assets and skills needed to implement the strategy

Assets and skills: those assets and skills required to implement a chosen strategy

Industrial Organization

ModelThe External Environment

An Attractive Industry

Strategy Formulation

Assets and Skills

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I/O Model of Above-Average Returns

5. Use the firm’s strengths (its developed or acquired assets and skills) to implement the strategy

Strategy implementation: select strategic actions linked with effective implementation of the chosen strategy

Industrial Organization

ModelThe External Environment

An Attractive Industry

Strategy Formulation

Assets and Skills

Strategy Implementation

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I/O Model of Above-Average Returns

Industrial Industrial Organization Organization

ModelModelThe External EnvironmentThe External Environment

An Attractive IndustryAn Attractive Industry

Strategy FormulationStrategy Formulation

Assets and SkillsAssets and Skills

Strategy ImplementationStrategy Implementation

Superior ReturnsSuperior Returns

Superior returns: Superior returns: earning of above-earning of above-average returnsaverage returns

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1.Strategy dictated by unique resources and capabilities of the firm (what can the firm do best?)

2.Find an environment in which to exploit these assets (where are the best opportunities?)

Resource-based Model of Above Average Returns

1. Firm’s Resources

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1. Identify the firm’s resources-- strengths and weaknesses compared with competitors

Resources: assets (tangible or intangible) used in delivering products or services

Resource-based Process

Resource-based Model

Resources

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2. Determine the firm’s capabilities--what it can do better than its competitors

Capability: how resources are managed and integrated in the delivery of a product or service

Resource-based Process

Resource-based Model

Resources

Capability

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Four Attributes of Resources and Capabilities (Competitive Advantage)

the firm is organized appropriately to obtain the full benefits of the resources in order to realize a competitive advantage

Valuable allow the firm to exploit opportunities or neutralize threats in its external environment

Rare possessed by few, if any, current and potential competitors

Costly to imitate when other firms cannot obtain them or must obtain them at a much higher cost

Nonsubstitutable

Reso

urc

es

an

d C

ap

ab

iliti

es

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Core Competencies

Resources and capabilities that meet these four criteria become

a source of:

Valuable

Rare

Costly to imitate

Nonsubstitutable

Core Competencies

Reso

urc

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an

d C

ap

ab

iliti

es

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Core Competencies are the basis for a firm’s

Competitive advantage

Strategic competitiveness

Ability to earn above-

average returns

Core Competencies

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3. Determine the potential of the firm’s resources and capabilities in terms of a competitive advantageCompetitive advantage: ability of a firm to outperform its rivals in the creation of value.

Resource-based Process

Resource-based Model

Resources

Capability

Competitive Advantage

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4. Locate an attractive industry

An attractive industry is one with opportunities that can be uniquely exploited by the firm’s resources and capabilities

Resource-based Process

Resource-based Model

Resources

Capability

Competitive Advantage

An Attractive Industry

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5. Select a strategy that best allows the firm to utilize resources and capabilities (that are superior to its rivals) relative to opportunities in the external environment

Strategy formulation and implementation: strategic actions taken to earn above average returns

Resource-based Process

Resource-based Model

Resources

Capability

Competitive Advantage

An Attractive Industry

Strategy Form/Impl

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Resource-based Model of Above Average Returns

Resource-based Model

Resources

Capability

Competitive Advantage

An Attractive Industry

Strategy Form/Impl

Superior Returns

Superior returns: earning of above-average returns

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Strategic Intent

The resources required to realize the strategy may not be available initially

Intent is about seeing the end state and deciding how to leverage internal resources, capabilities, and core competencies in a “staged” approach

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Groups who are affected by a firm’s performance and who have claims on its wealth

The firm must maintain performance at an adequate level in order to retain the participation of key stakeholders

The Firm and Its Stakeholders

Stakeholders

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Capital Markets

Critical dependency: Stakeholders

Shareholders (institutional ownership most active)

Major suppliers of capital

•Banks•Private lenders•Venture capitalists

Stakeholders Provide Resources

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Capital Markets

Product MarketsPrimary customersSuppliersHost communities & regulatory bodiesUnions

Stakeholders Provide Resources

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Capital Markets

Product Markets

OrganizationalEmployeesManagersNonmanagers

Stakeholders Provide Resources

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Stakeholder Involvement

Two issues affect the extent of stakeholder involvement in the firm

How do you divide the returns to keep stakeholders involved?

E.g., Compensate employees? Increase dividends? Increase product value?

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Capital Market

Product Market

Organizational

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Stakeholder Involvement

Two issues affect the extent of stakeholder involvement in the firm

How do you increase the returns so everyone has more to share?

2

Capital Market

Product Market

Organizational

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Some financial metrics

Profitability: important to Shareholders and Senior Managers

Shareholders: ROE - return on equity Dividend Yield

Senior Mgrs: ROA - return on assets Expense RatiosROS - return on sales Profit Margin

Liquidity: Impt to Lenders

Current RatioDebt/Equity RatioQuick Ratio

Efficiency: Internal Usage

Accounts Receivable TurnoverInventory Turns

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Cases• Describe actual situations

– Forces you to choose among different options and plan implementation actions

• Cases include background events and supporting materials– Financial statements– Operational data – Product lists– Transcripts of interviews with employees

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Case Skills • Evaluate

– multiple aspects of a business situation – differentiate significant factors – deal with uncertainty, missing information

• Envision – explanations not readily apparent– outcomes of decisions

• Integrate/Synthesize– understand firm-level effects – interdependencies

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Case Analysis• Put yourself “inside” the case

– Strategic decision maker– Board member– Outside consultant

• Purpose is to diagnose problems and find solutions. Unravel the case material. – Background/Problem Statement 10-20%– Strategic Analysis/Options 60-75

%– Recommendations/Action Plan 10-20%