BUAD 497 Strategic Management Session 2 What is Strategy Agenda Questions lingering from Session 1 Porter What is Strategy Flash Review Brief Discussion Make sure we understand the main ideas In Class Case Exercise Discussion Strategic Positioning Trader Joe s and ALDI Application of the ideas A bit of history and etymology We tie the beginning of the study of strategy to Sun Tzu s book The Art of War written about 500 BC Strategy is originally a military concept as its etymology shows it is a complex word derived from the ancient Greek terms stratos army and agein to lead Modern business strategy emerged as field of study in the mid 20th century To win one hundred victories in one hundred battles is not the acme of skill To subdue the enemy without fighting is the acme of skill What is Strategy the determination of the basic long term goals and objectives of an enterprise and the adoption of courses of action and the allocation of resources necessary for those goals Alfred Chandler 1962 founding father of business strategy discipline Chandler Alfred Strategy and Structure Chapters in the history of industrial enterprise Doubleday New York 1962 Intended and emergent strategies Strategy that the company intends to implement Intended strategy that the company implements successfully Nonrealized Strategy Realized Strategy pattern of actions Strategy that the company really follows Strategy that due to unintended activates emerged over time or an intended strategy that radically shifted Henry Mintzberg Mintzberg H Waters J A 1985 Of strategies deliberate and emergent Strategic Management Journal 6 257 272 Intended vs Emergent Strategies Strategic management process leads managers to intended strategies However conditions often change or new information becomes available Managers respond and adopt emergent strategies As Amazon invested in ways to make book selling online streamless the activities easily transitioned and transferred to other forms of selling 6 What is Strategy broad formula for how a business is going to compete what its goals should be and what policies will be needed to carry out those goals and the combination of the ends goals for which the firm is striving and the means policies by which it is seeking to get there Michael Porter 1980 Strategy defines the company s distinctive approach to competing and the competitive advantages on which it will be based Porter Michael E 1980 Competitive Strategy Free Press Strategic challenge of organizations COMPETING TO BE THE BEST COMPETING TO BE UNIQUE The worst error in strategy is to compete with rivals on the same dimensions Michael Porter What is Strategy Flash Review We will do a flash review using Kahoot 12 questions from the reading not graded Go to Kahoot it on your computer or phone Enter the game pin which I will share Please use your USC student ID in place of your name Scores for the top several students will be shown leaderboard A quote from Charlie Munger For example when we were in the textile business which is a terrible commodity business we were making low end textiles which are a real commodity product And one day the people came to Warren and said They ve invented a new loom that we think will do twice as much work as our old ones And Warren said Gee I hope this doesn t work because if it does I m going to close the mill And he meant it What did Warren Buffet mean by this A quote from Charlie Munger What was he thinking He was thinking It s a lousy business We re earning substandard returns and keeping it open just to be nice to the elderly workers But we re not going to put huge amounts of new capital into a lousy business And he knew that the huge productivity increases that would come from a better machine introduced into the production of a commodity product would all go to the benefit of the buyers of the textiles Nothing was going to stick to our ribs as owners That s such an obvious concept that there are all kinds of wonderful new inventions that give you nothing as owners except the opportunity to spend a lot more money in a business that s still going to be lousy The money still won t come to you All of the advantages from great improvements are going to flow through to the customers The great lesson in microeconomics is to discriminate between when technology is going to help you and when it s going to kill you And most people do not get this straight in their heads But a fellow like Buffett does What is Strategy 1980 s View Operational effectiveness Performing business activities more efficiently than others Be flexible to respond rapidly Benchmark continuously to achieve best practice Outsource aggressively to gain efficiencies Predominant view of business consultants in the 1980 s Improving operational effectiveness maximum value a company can deliver at a given cost Productivity Frontier high d e r e v i l e d e u l a v r e y u b e c i r p n o N low Munger was talking about tech which pushes the productivity outward but creates no relative advantage for any of the firms With the new loom all firms have to invest just to keep pace high Relative cost position low What strategy is not Operational effectiveness Operational effectiveness is necessary but not sufficient Refers to performing the activities better than rivals e g faster fewer inputs etc Note that new tech which is proprietary may form the basis for a cost leadership strategy Operational effectiveness might offer competitive advantage but this is not sustainable Tend to be easily emulated Eventually competitive convergence Consultant speak best practices Firms may do these things but they cannot be the source of an advantage Classic Business Cases TOYOTA PRODUCTION SYSTEM Just in time manufacturing processes deep relationships with suppliers reduces defect rate while increasing innovation What types of automobile manufacturers would not invest in these capabilities None the Toyota production system was widely studied and then widely copied hence the productivity frontier expanded Toyota is still doing well they made other investments not JIT alone SOUTHWEST AIRLINES Low cost convenient service on short routes no premium cabin no meals no assigned seats no travel agents standardized fleet secondary airports etc What types of airlines would not invest in these capabilities These are not consonant with international business travel How easily can other airlines copy these capabilities if they want to Can we pinpoint what single