UNINT FACOLTÀ DI ECONOMIA A.A. 2017-18 COMPETITIVE STRATEGY Prof. David D’Angelo COMPETITIVE STRATEGY (2017-2018) STRATEGIC THINKING WHAT IS A ‘STRATEGY’? Etimologically, the term “Strategy” comes from Ancient Greek: • στρατηγία (stratēgía, “office of general, command, generalship”) ➢ from στρατηγός (stratēgós, “the leader or commander of an army, a general”) from ➢στρατός (stratós, “army”) + ➢ἄγω (ágō, “I lead, I conduct”) WHAT IS A ‘STRATEGY’? Some definitions “Strategy can be defined as 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 carrying out those goals” Chandler, Alfred, Strategy and Structure: Chapters in the history of industrial enterprise, Doubleday, New York, 1962. “...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.” Porter, Michael E. (1980). Competitive Strategy. … continue … WHAT IS A ‘STRATEGY’? Henry Mintzberg described five definitions of strategy in 1998: • Strategy as plan – a directed course of action to achieve an intended set of goals; similar to the strategic planning concept; • Strategy as pattern – a consistent pattern of past behaviour, with a strategy realized over time rather than planned or intended. Where the realized pattern was different from the intent, he referred to the strategy as emergent; • Strategy as position – locating brands, products, or companies within the market, based on the conceptual framework of consumers or other stakeholders; a strategy determined primarily by factors outside the firm; • Strategy as ploy – a specific manoeuver intended to outwit a competitor; • Strategy as perspective – executing strategy based on a "theory of the business" or natural extension of the mind-set or ideological perspective of the organization. (Mintzberg, H. Ahlstrand, B. and Lampel, J. Strategy Safari : A Guided Tour Through the Wilds of Strategic Management, The Free Press, New York, 1998. WHAT IS A ‘STRATEGY’? Strategies in Game Theory (GT) A strategy is a complete, contingent plan of action that specifies a feasible action for each player in every contingency (i.e. information set) in which the player might be called on to act (regardless of whether that information set is reached during the game!) ‘STRATEGY’ in the business context It is with the Second Industrial Revolution (1879 - 1914) that the strategic terminology came to be adapted to business contexts. Strategy ➢ as a way to shape market forces and affect the competitive environment; ➢ along with the emergence of large, vertically-integrated company heavily investing in manufacturing, marketing and hierarchies to coordinate those functions. ‘STRATEGY’ in the business context Alfred P. Sloan, the CEO of General Motors from 1923 to 1946, developed a successful strategy based on what he thought were the strenghts and weaknesses of his company’s critical competitor (Ford Motor Company) read article from «The Economist». ‘STRATEGY’ in the business context After WWII (which also represented an event of stimulus for the development of ‘strategic thinking’, intended as the problem of allocating scarce resources across the entire economy), new techniques using quantitative analysis in formal strategic planning (e.g. LINEAR PROGRAMMING) were devised. In 1944, John von Neumann and Oskar Morgenstern published their milestone book The Theory of Games and Economic Behavior (1944, Princeton) Wartime experiences (military aircraft industry – ‘learning curve’) encouraged the use of formal strategic thinking to guide management decisions. ‘STRATEGY’ in the business context «Management is not just passive, adaptive behavior; it means taking action to obtain the desired results come to pass» Managing «… implies responsibility for attempting to shape the economic environment, for planning, initiating, and carrying through changes in that economic environment, for constantly pushing back the limitations of economic circumstances on the enterprise’s freedom of action» (Peter Drucker, ‘The practice of management’, 1954) ‘STRATEGY’ in the business context HENCE … By consciously using formal planning, a company could exert some positive control over market forces ‘STRATEGIC THINKING’ in business schools Harvard Business School (1908) was one of the first schools to promote the idea that managers should be trained to think strategically rather than just act as functional administrators. In 1912, Harvard introduced a required second-year course in «Business Policy» that was designed to integrate the knowledge from functional areas (accounting, operations, finance, etc.) with a broader perspective on the strategic problems faced by corporate executives. In 1960’s, classroom discussions in business schools began to focus on matching a company’s «strengths» and «weaknesses» (its distinctive competence) with the «opportunities» and «threats» that it faced in the marketplace. This framework (now referred to as SWOT Analysis) represented a major step forward in explicitly bringing competitive thinking into focus. ‘STRATEGIC THINKING’ in business schools Always in 1960’s, H. Igor Ansoff (1918-2002), suggested that a company, when considering to invest in new products, should first ask whether the new product had a ‘common thread’ with existing products. He defined the ‘common thread’ as a FIRM’S MISSION, the firm’s commitment to exploit an existing need in the market as a whole. To enable firms maintain their strategic focus, Ansoff suggested four categories for defining the common thread in its business strategy. STRATEGY CONSULTANTS In the 1960’s and 1970’s Rise of a number of ‘strategy consulting practices’. BCG (1963) among the first to apply quantitative research to problems of business and corporate strategy. STRATEGY CONSULTANTS BCG developed its own version of the ‘learning curve’, the EXPERIENCE CURVE (1965), with the purpose of explaining price and competitive behaviour in the fastest growing segments of industries. BCG’s finding was that for each doubling of cumulated output, total costs would decline roughly 20% because of: - Economies of scales Organisational learning Technological innovation Strategic implications: the producer who has made most units should have the lowest costs and the highest profits. STRATEGY CONSULTANTS In the early 1970’s BCG developed yet another powerful oversimplification: The GROWTH-SHARE MATRIX i.e. the relative potential of a diversified company’s portfolio of business units as areas for investments was compared by plotting them on a grid. Strategic implications: maintain a balance between ‘cash cows’ and ‘stars’ while allocating some resources to fund ‘question marks’ (potential stars). ‘Dogs’ are to be sold off. STRATEGY CONSULTANTS In 1970 McKinsey, studying how to best organise the strategic business units (SBUs) of GE proposed a generalisation of the growthshare matrix, known as the GE/McKinsey nine-block matrix or Industry AttractivenessBusiness Strength Matrix Strategic implications: Grow BU’s in the blue area Hold BU’s in the yellow area Harvest BU’s in the red area STRATEGY CONSULTANTS ADL Life-cycle Matrix The ADL model from the consulting company Arthur D. Little expanded even further on this, devising a portfolio management method based on product life-cycle thinking. In the 1970’s basically all major consulting firms used some sort of portfolio planning to generate strategy recommendations. PROBLEMS AND PROMISE (change) Ironically, the conditions that initially determined the popularity of portfolio planning (oil crisis in 1973 especially), also raised questions on the experience curve. Some began to argue that the consequence of intensively pursuing a cost-minimising strategy (like the ones based on the experience curve) would be a reduced ability to make innovative changes and to respond to those introduced by competitors. As for portfolio planning, one problem was that strategic recommendations for a SBU often were inordinately sensitive to the specific portfolio planning technique employed. In the words of a McKinsey’s executive, Fred Gluck,: «The heavy dependence on ‘packaged’ techniques has frequently resulted in nothing more than a tightening up, or fine tuning, of current initiatives within the traditionally configured businesses» PROBLEMS AND PROMISE (change) In order to loosen some of the constraints imposed by the mechanistic approaches, it was proposed that successful companies’ strategies progress through four phases involving an increasing level of dynamism, multidimensionality, and uncertainty. The first two phases pertain to Static Analysis the other two to Dynamic Analysis ‘To know’ To know Be sure that, by the end of this module, you are able to illustrate: • • • • • • • • • • • Definition(s) of ‘strategy’; Early development of ‘strategic thinking’ in business context; Early development of ‘strategic thinking’ in business schools; The role of consulting firms and the tools they developed; Problems and critiques to early developments in ‘strategic thinking’ The Ansoff Matrix; The Experience curve; The Growth-Share Matrix; The GE/McKinsey Matrix; The ADL Life-Cycle Matrix; The Four Phases in the Evolution of Formal Strategic Planning Glossary Glossary: • • • • • • • • • • • Distinctive competence Experience curve / Learning curve Portfolio planning Strategic Business Units (SBUs) Strategy SWOT Analysis The ADL Life-Cycle Matrix; The Ansoff Matrix; The Four Phases in the Evolution of Formal Strategic Planning by Gluck; The GE/McKinsey Matrix; The Growth-Share Matrix.
