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STRATEGIC MANAGEMENT (Bruno Cassiman - ): Very complete notes from the lectures, guest lectures, including slides & required readings summaries.
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An-Sophie Baudoin 2019-2020STRATEGIC MANAGEMENT
___________ WHAT IS STRATEGY? ___________
WHAT IS STRATEGY?
A strategy is the choice of a future for the organization and a way to reach that future. It is the
framework that coordinates, unifies and integrates the company’s decisions and actions and
positions a business in an industry so as to generate superior financial returns over the long run.
It is a smallest set of choices (announced or investigated by a strategist) to optimally guide – or
force – other choices.
Strategies are always about the uncertain future – no one knows the right decisions to take now.
Strategy focuses on interdependence and alignment and is influenced by the environment (industry
value system) as well as by firm-specific aspects. Strategic decisions are constrained by the vision,
mission & values of the company. Execution (matter of leadership) and implementation are also
crucial: a good strategy needs to be executed. A good strategy not implemented, or a bad strategy
implemented both result in a negative outcome.
The vision is a concise statement that defines the mid- to long-term goals of the organization. The
stretch goal in the vision statement should truly be a difficult reach for the company in its present
position, challenging even well-performing organizations to be become much better.
The direction of the company is oftentimes indicated in the company’s mission, a statement
explaining why a company exists, its purpose. It gives directions for what the company wants to
do and accomplish. Just as the vision, the purpose really restricts what the company can and should
do. It restricts also strategic decision making.
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The values of a company prescribe the attitude, behavior, and character of an organization. Value
statements (lengthy) describe the desirable attitudes and behavior the company wants to promote
and the forbidden conducts (bribery, harassment, conflicts of interest) employees should avoid.
As strategy is a framework that aims to integrate, all employees should be able to express the
strategy statement, which resumes the strategy with simple words, for it to be comprehensive. It
should include the objective, the scope (what? where? who? when? how?), the competitive
advantage and how to develop it. That way, every worker knows where the company is headed. A
secret strategy is never good as it results in employees not knowing what direction to take and thus
cannot take good decisions.
What is strategy?
OPERATIONAL EFFECTIVENESS IS NOT STRATEGY
Companies must be flexible to respond rapidly to competition and market changes. The problem
is the failure to distinguish between operational effectiveness and strategy. OE and strategy are
both essential to superior performance (= the primary goal of any enterprise), but they work in ≠
ways. A company can outperform rivals only if it can establish a sustainable difference. It must
deliver greater value to customers or create comparable value at a lower cost or both.
• Operational effectiveness (OE) means performing similar activities better than rivals
perform them. It includes efficiency. It refers to practices that allow a company to better
utilize its inputs by reducing defects in products or developing better products faster.
• Strategic positioning means performing ≠ activities from rivals’ or performing similar
activities in ≠ ways.
Constant improvement in OE is necessary to achieve superior profitability, but not sufficient.
OE competition shifts the productivity frontier (sum of all best practices at any given time/the
maximum value that a company can create at a given cost, using the best technologies, skills,
management techniques, and purchased inputs) outward, as new technologies and management
approaches are developed and as new inputs become available; raising the bar for everyone. Such
competition produces absolute improvement in OE, but it leads to relative improvement for no one.
The more rivals outsource activities to efficient 3rd parties, the more generic those activities
become. As rivals imitate each other’s quality improvements, cycle times, supplier partnerships;
strategies converge, and competition becomes a race on an identical path where no one can win.
STRATEGY RESTS ON UNIQUE ACTIVITIES
Competitive strategy is about being ≠. A strategy is the creation of a unique and valuable position
to deliver a unique mix of value, involving a different set of activities. Strategic positions emerge
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from 3 sources, which are not mutually exclusive and often overlap:
• Variety-based positioning: based on product varieties rather than customer segments.
• Need-based positioning: serving most or all the needs of a particular customer group.
• Access-based positioning: segmenting customers who are accessible in ≠ way (rural or
urban-based customers). Needs are similar, but the best way to reach them is different.
A SUSTAINABLE STRATEGIC POSITION REQUIRES TRADE-OFFS
Choosing a unique position is not enough to guarantee a sustainable advantage. A valuable position
will attract imitation by incumbents, likely to copy it in 2 ways:
• A competitor can reposition itself to match the superior performer.
• Straddling: the straddler seeks to match the benefits of a successful position while
maintaining its existing position.
A strategic position is not sustainable unless there are trade-offs with other positions. Trade-offs
occur when activities are incompatible and arise for different reasons:
• Inconsistencies in image or reputation.
• Trade-offs arise from activities themselves.
• Trade-offs arise from limits on internal coordination and control.
Positioning trade-offs create the need for choice, purposefully limiting what a company offers and
protect against repositioners and straddlers.
Strategy is making trade-offs in competing. The essence of strategy is choosing what not to do.
Without trade-offs, there would be no need for choice and thus no need for strategy. Any good idea
would be quickly imitated. Again, performance would once again depend wholly on OE.
FIT DRIVES COMPETITIVE ADVANTAGE AND SUSTAINABILITY
Positioning choices determine which activities a company will perform and how it will configure
individual activities and also how activities relate to one another. While OE is about achieving
excellence in individual activities, or functions; strategy is about combining activities. Fit is
important because discrete activities often affect one another. Fit locks out imitators by creating a
chain that is as strong as its strongest link. There are 3 types of fit:
• 1st order: simple consistency between each activity (function) and the overall strategy. It
ensures that the competitive advantages of activities accumulate and do not erode or cancel
themselves out.
• 2nd order: activities are reinforcing one another.
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• 3rd order: optimization of effort (coordination and information exchange across activities
to eliminate redundancy and minimize wasted effort).
Strategic fit among many activities is fundamental to competitive advantage and to the
sustainability of that advantage. It is harder for a rival to match an array of interlocked activities.
Strategic positions should have a horizon of at least a decade, not of a single planning cycle.
REDISCOVERING STRATEGY
• The failure to choose: caught up in the race for OE, many managers simply do not
understand the need to have a strategy.
• The growth trap: compromises and inconsistencies in the pursuit of growth will erode the
competitive advantage a company had with its original varieties or target customers.
• Profitable growth: concentrate on deepening a strategic position rather than broadening and
compromising it (those could best contain the risk by creating stand-alone units, with their
own brand name and tailored activities).
• The role of leadership: management’s core is strategy: defining and communicating the
company’s unique position, making trade-offs and forging fit among activities. The
operational agenda involves continual improvement where there are no trade-offs (change,
flexibility, efforts to achieve best practices). The strategic agenda is the place for defining
a unique position, making clear trade-offs, and tightening fit. Strategic continuity doesn’t
imply a static view of competition. A company may have to change its strategy if there are
major structural changes in its industry. A company’s choice of a new position must be
driven by the ability to find new trade-offs and leverage a new system of complementary
activities into a sustainable advantage.
THE ROLES OF STRATEGY
STRATEGY AS DECISION SUPPORT & AS COORDINATING DEVICE
Despite the uncertainty, strategic thinking should at least eliminate bad decisions and lead towards
good ones. Moreover, strategy is useful to make sure everybody is on the same page.
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What is a strategic decision?
A decision is strategic if it is investigated or announced as part of the optimal strategy.
Companies make thousands of decisions every day but should focus on the one that is going to
influence everything else. Indeed, in big organizations there is a lot of different players (marketing,
finance). Each of them makes decisions but has only local information, about their part of the
business, and maximizes the return from their individual decision. It is hard to know what others
are doing and make sure everyone coordinates.
Decisions have a standalone value (𝛼): there are many things an individual could decide to do but
there might be only one particular decision that is optimal from a standalone perspective.
If decisions are complements, they need to be coordinated and the interaction value of the decision
will be . The standalone decision is different from the interaction decision.
Probability that a random selection of decisions gets it right is zero, because there are so many
decisions.
Example: 3 possible decisions: C1 (product development), C2 (marketing), C3 (operations).
• 𝛼1 = 0,8 = the optimal decision (locally) for C1 (product development)
• If C2 (marketing) coordinates with C1 (product development): 21 = 0,8
Investigating the best decision will be costly. If there’s no common strategy, all decisions will be
standalone and locally optimal; because the departments don’t know the decisions of the others.
→ The payoff is going to be: 0,8 + 0,3 + 0,1 = 1,2
Now, if C2 says they’re doing X (and the investigation shows that it is indeed the right decision),
they will get 0,3 because it chose the optimal decision. However, the other departments can still
choose: if C1 wants to coordinate, the interaction value is 0 or they can do whatever is good for
them (take the standalone decision) and get 0,8. C3 can coordinate and get 0,8 (more than the
standalone value).
→ The payoff is going to be: 0,8 + 0,8 + 0,3 = 1,9
→ The value of the announcement of this strategy is 0,7
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The value of having a strategy is higher (1.9 > 1.2). We can even do better and investigate what’s
best for C1 (strategic choice), have C2 and C3 coordinate (with C1)(aligned choices) and see if it
scores higher than 1,9:
→ The payoff is going to be: 0,8 + 0,8 + 0,8 = 2,4
→ This is the optimal strategy
→ Strategy is used as a coordinating device
→ INTERDEPENDENCE AND INTERDEPENDENT DECISIONS:
• Internal coordination with other decisions is necessary to achieve coherence cross-section
and consistency overtime. Managers make decisions on a daily basis, so they need to
understand the strategy of the company. Decisions need to add up so that the company can
go in the desired direction. It will result in fits but also in trade-offs (strategy is also about
knowing what not to do). A strategy is valuable if alignment or coordination is needed.
However, the strategist might only be correct with a certain probability:
• A strategy is more valuable if it’s more reliable (focus on more stable factors).
• A strategy is more valuable if decisions tend to be irreversible.
• An option to commit makes decisions more strategic (size of the investment, timing of
the decision (at the perfect time)).
• External interdependence: reaction from competitors or other players (complementors,
suppliers, customers) might arise and have positive or negative consequences.
• With a small number of players, a company can influence the direction of the industry
when player interact with each other.
• Game theory with a complete contingent plan of action – optimization of the company’s
decisions considering potential external reactions.
STRATEGY AS A TARGET
The financials are less and less relevant to understand what the market value of the company is
because of intangibles (brand name, R&D). A lot of the value lies within the strategy.
To be successful with a strategy, it’s important to be different and creative.
Strategy and vision
Successful companies try to boldly go where no one has gone before.
• Apple wanted easy to use computers for everyone. Another big computer CEO at the
time didn’t think there was a reason why people would need a computer at home. Both
knew the business, but they had different visions, and therefore different strategies.
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• Walmart started to implement discount supermarkets in small cities. To do so, they had
to figure out the whole distribution process systems. Now, Walmart is the biggest player
in the industry, even though people didn’t fear it at first.
Acting differently starts with the vision.
LONG-TERM PERFORMANCE OF COMPANIES
Strategy is about the long-term performance of the companies.
Ryanair
In airlines, the capital gets stuck in the planes, which only make return when flying. Because of
that, Ryanair makes everything possible to turn the plane around as fast as possible. Some changes
have been made since they first started their business: they used to operate in small airports such
as Charleroi. In those secondary airports, traffic was low, so they were able to land and then take
off almost right after because no one was in their way. It does not work that way in Brussels or in
Frankfurt because there is way more airlines in those main airports.
In the beginning, they were not even giving seat assignment: it resulted in the planes filling faster.
Moreover, unlike Eurowings, they do not allow connecting flights, so they do not have to wait for
the luggage to be transferred or for a late plane to arrive.
Ryanair has been performing very well for 20+ years now: despite the toughness of the airline
industry, it is one of the most profitable airlines in the world and it has been really hard for other
companies to replicate what Ryanair achieved. However, they have been facing trouble recently
with their move to more primary airports and thus becoming dependent on others, putting a lot of
pressure on people with their low-cost model. No matter how good their model is for money
making, it is putting pressure on other elements of the business, such as the staff.
Spanair, Air Berlin & WOW Air
Spanair wanted to make Barcelona’s airport an intercontinental flights hub but went out of
business. They were aiming for business class services and VIP lounges (no frills airlines).
Many airlines try to enter the (low-cost) sector but most of them go out of business (Wow Air or
Air Berlin). Only a few are actually profitable and none of them is nearly as profitable as Ryanair.
Brussels Airlines
In 2016, Brussels Airlines was becoming a low-cost airline. They decided to change things and let
consumers choose: they can pay more for more services or be ok with lower service and pay less.
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Kodak and Fujifilm
Different companies can react differently to a same difficult situation in a hostile environment.
Kodak and Fujifilm were competitors until phones with digital cameras became popular. Kodak
did not switch fast enough to the digital technology, even though they had the first digital camera,
went bankrupt and ended up disappearing. Fujifilm did something different. They realized that
films were not the future, but they had the capability of working with chemical products and
especially antioxidants, which are used against skin ageing. They thus decided to move into the
beauty care industry, where they have been quite successful in terms of anti-ageing creams.
POSITIONING WITHIN THE INDUSTRY – POSITIONING MATTERS
Delhaize and Colruyt
Delhaize and Colruyt have different positioning. Colruyt is focusing on low prices, as can be seen
in all their commercials, while Delhaize is trying to get out of that by focusing on quality but not
without trouble (it was merged with Albert Heijn so it has somewhat recovered). Delhaize is trying
to differentiate and take up a new position in the market, but retailing is mainly about pricing.
Facebook and LinkedIn
LinkedIn and Facebook are both social medias networks. However, Facebook focuses on friends
and family while LinkedIn focuses on the professional market. Although they are in the same
business, they have very different positioning.
Xior
Xior focuses on student housing. It is very unique to focus on such a market, but it is the result of
a strategic decision. Indeed, Xior saw the many potential advantages. Most real estate companies
are not that focused. However, it is working well as they even started expanding abroad.
CHOOSING A TARGET MARKET
Ducati and Harley Davidson
Different people buy each of these brands. It has to do with marketing and market segmentation
targeted at specific so-called typical customers.
Athenaeums and catholic schools
Both of these schools attract different people, even though both are state-financed.
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RESOURCES AND CAPABILITIES
Apple and Google
Apple and Google are both in the smartphone business. While Google makes money with
advertising and out of searches, Apple makes money mainly through the App Store, earning 30%
of each transaction, and to a lesser extent by selling hardware. They each look at the business from
different angles but compete in the same environment.
• What does the company expect for its LT return?
• How does it position itself in the industry?
• How does the company make choices?
• What is the target market?
• What are the resources and capabilities of Apple going into smartphones?
• What are the resources and capabilities of Google going into smartphones?
COMPETITION AND MARKET ENTRY
Amazon Go
Amazon created its just-walk-out technology, allowing customers to shop rapidly and pay through
an app. In the ads, the focus is on the convenience and prices are never mentioned, unlike in Aldi
or Colruyt’s ads. It is a ≠ shopping experience but it will probably be more expensive. It raises
societal questions about the need for less workers, as well as questions about privacy. Amazon has
not been clear about the technology, but it seems that the system will be taking pictures of
customers to know what they are putting in their bags. Big players are under pressure because of
the arrival of such competitors (Jumbo, Deliveroo), leading to considerable changes in the business.
• How is Amazon Go competing?
• How are competitors competing?
• What is the future of supermarkets going to look like?
GLOBALIZATION
Globalization has had an impact on strategy and needs to be integrated into the strategic thinking.
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TECHNOLOGY CONVERGENCE
Amazon versus Apple, Kindle versus iPad
Amazon (biggest online store) just bought Whole Food (retailer) while Apple is going into the car
business by developing software.
• How is technology driving and impacting strategy?
• What is AI going to do to the different players?
• How can AI be integrated in strategic thinking and strategy in general?
IRREVERSIBILITY OF DECISIONS
Boeing and Airbus
Airbus considered the future to be about bringing people to hubs, with big planes to fly between
hubs, and then bring them to smaller locations, with smaller planes to fly from hubs to other areas.
→ Strategic decision: A380
Boeing considered the future to be about bringing people from point to point, with small, fast &
efficient planes.
→ Strategic decision: Dreamliner (Boeing 787)
Strategic decisions cannot be changed overnight: it is about commitments, even though that might
restrict the company’s movements in the future.
SUSTAINABILITY
Madonna versus Spice Girls, versus Psy, versus Justin Bieber
Madonna is a businesswoman. She is still around after all these years because she succeeded in
sustaining her business overtime by changing and evolving; unlike the Spice Girls, Psy, or Justin
Bieber (who is still around, but for how long?).
NON-MARKET STRATEGIES
Uber
Uber went IPO while being a new player and has been involved in lots of fights and disagreements
in many countries. Their mission has become a controversial topic, probably because regulations
are a political matter. The taxis have used decades of political contributions and influence to restrict
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