Transcript Chapter 1 The Nature of Strategic Management






Instructor:
E-mail Address:
Office:
Michael Cooke
[email protected]
IC room 817
Class hours:
Class Location:
Tuesday 09:00-12:00
IC room 822

The number of chicken restaurants in Korea has tripled to 36,000
in ten years
◦ Many of these are family owned
◦ Families use homes as collateral
◦ Interest rates are low

South Korean household debt is rising
◦ Increased by 35% as percentage of income since 2003
◦ Similar story through much of Asia as growth slows
 Singapore and Hong Kong have property booms
 These come with rising consumer debt



Koreans borrow because of retirement
◦
◦
◦
◦
The population is aging
Many companies force employees to retire in their 50s
Pensions are too small so families start businesses
Among working Koreans in their 50s, 32% are self employed
◦
◦
◦
◦
7,400 fried chicken restaurants open every year
5,000 go bankrupt
80% fail within 10 years, half within 3 years
Aging Koreans use property as collateral to open these businesses
Most of the restaurant businesses fail
Government now limits franchises from opening too many outlets
in the same area
Wall Street Journal 13-9-2013

In 13 years running a fried chicken business a
65 year old owner has had no holiday and
works 15 hours per day*
◦ This owner still falls behind in debt payments
◦ Twice fried Korean fried chicken became a popular
food in 2002, during the World Cup
◦ Where an area had 3 chicken joints in 2000, it now
has 11


What does KFC have to do with business
strategy in Thailand (or elsewhere)?
We will cover demographics, the competitive
landscape, the role of government, and
business resources (financial and human)
*Wall Street Journal 16-9-2013
No.
Criteria
%
1
Midterm Examination
20
2
Final Examination
30
3
Presentations
20
4
Quizzes and participation
30
Total
100
-Students must be punctual to take a quiz. Early exit is scored as no participation.
-Disrupting the class may be marked as absent. Absence scores zero participation.
-The university enforces an 80% attendance policy (maximum 3 absences allowed).
Plan for the Semester
Week
Starting
Topic
Reading for the Week
1
15 October
Introduction to the course – Korean Fried Chicken
David pp 36-69
2
22 October
Business Mission, Agency Problems
3
29 October
External Assessments & Porter
4
5 November
Global Business Environments/Entry
5
12 November
Internal Assessment
David pp 122-160
6
19 November
Types of Strategies
David pp 162-203
7
26 November
Strategy Analysis SWOT, BCG
David pp204-241
8
3 December
Strategy Implementation - 1
David pp 242-281
9
9-16 December
10
17 December
Implementing Strategies -2
David pp 282-315
11
24 December
Strategy Review and Control
David pp316-339
12
7 January
Business Ethics and Review
David pp 342-355
13
28 January
Presentations
14
4 February
Presentations
15
11 February
Special topics – limits of the firm
16
17 Feb-6 Mar
David pp 74-89, Kodak
David pp 92-119
Zhang pp 1-17 & 26-28
Midterms
Final Examinations
David, Fred R. (2011) “Strategic Management” Pearson, Upper Saddle River NJ, USA
Zhang, Z. John, and Zhou, Dongshen (2007) “The Art of Pricewar” Wharton-University of Pennsylvania
We will follow the above sequence while allowing for a more international perspective than the David text offers.
Graphic: Copyright © 2011 Pearson Education, Inc.
A Painting of 17th-century Venice, with a view of the Doge’s Palace, by Leandro Bassano
The Law of Large Numbers
 A passage from a recent Cnet article about a technology
company: “transition from being considered a "high-growth tech stock,
valued on its monster potential" to just another "cash cow, valued on its
ability to pump hundreds of billions of dollars into its shareholders'
pockets.“
 Who is this article about?
 The title of the article is ‘The Law of Large Numbers’. Any
guesses what this means in the context of business strategy?
 How are growth companies and cash cows different?
http://news.cnet.com/8301-13579_3-57581059-37/apple-newest-victim-of-the-law-of-largenumbers/?tag=nl.e703&s_cid=e703&ttag=e703
Strategy Defined
 Many definitions of business strategy
Johnson and Scholes: "Strategy is the direction and scope of an organization over the longterm: which achieves advantage for the organization through its configuration of resources
within a challenging environment, to meet the needs of markets and to fulfill stakeholder
expectations".
 Alfred Chandler's definition: "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 these goals."
 Business dictionary:
 1. A method or plan chosen to bring about a desired future, such as achievement of a goal or
solution to a problem.
 2. The art and science of planning and marshalling resources for their most efficient and
effective use. The term is derived from the Greek word for leading an army.
 Harvard Business School: You can't develop a strategy for your business without first thinking
through mission and goals. Likewise, you can't develop a coherent strategy in isolation from
decisions concerning the network of partners with whom the business will co-create and
capture value. By focusing on all four elements, and sequencing them in the right way, the
process of crafting strategy can be demystified

 Most definitions have these elements in common:
Goals
 Resources
 Plans

Strategy or Strategic Planning
 Strategic Planning or Strategic Management seeks to exploit and
create new opportunities
 Long Range Planning generally optimizes today’s trends
 Organizations should continually monitor internal and external
events and trends to adapt to changes
 Strategic Management at most universities integrates material
from all business courses (a capstone course)
 Since many of you have not yet taken accounting, economics, and so
on, we will be somewhat limited in our objectives
 My bias is a finance and marketing perspective
From “Only the Paranoid Survive”
Andy Grove
 We live in an age in which the pace of technological change is pulsating
ever faster, causing waves that spread outward toward all industries.
This increased rate of change will have an impact on you, no matter
what you do for a living. It will bring new competition from new ways
of doing things, from corners that you don't expect.
 If you run a business, you must recognize that no amount of formal
planning can anticipate such changes (strategic inflection points).
 Does that mean you shouldn't plan? Not at all.You need to plan the
way a fire department plans: It cannot anticipate where the next fire
will be, so it has to shape an energetic and efficient team that is capable
of responding to the unanticipated as well as to any ordinary event.
Strategic Inflection Points
Excerpts from “Only the Paranoid Survive”
 Strategic inflection points can be caused by technological change but they are more than
technological change. They can be caused by competitors but they are more than just
competition. They are scale changes in the way business is conducted, so that simply
adopting new technology or fighting the competition as you used to may be insufficient. They
build up force so insidiously that you may have a hard time defining what has changed.
 Strategic inflection points are often first identified by sales managers.
 Strategic inflection points do not always lead to disaster. When the way business is being
conducted changes, it creates opportunities for players who are adept at operating in the new
way. This can apply to newcomers or to incumbents, for whom a strategic inflection point
may mean an opportunity for a new period of growth.
 You can be the subject of a strategic inflection point but you can also be the cause of one.
Intel has been both. In the mid-eighties, the Japanese memory producers brought an
inflection point so overwhelming that it forced Intel out of memory chips and into the
relatively new field of microprocessors. The microprocessor business that we have dedicated
ourselves to has since gone on to cause inflection points for other companies.
 The increased rate of change will have an impact on you, no matter what you do for a living.
It will bring new competition from new ways of doing things, from corners that you don't
expect.
How to recognize inflection points (Grove)
 So how do we know whether a change signals a strategic inflection point? First, we must
figure out who our key competitor is. When the answer to this question is not as clear as it
used to be, it’s time to sit up and pay special attention. Does the company that in past years
mattered the most to us and our business seem less important today? Does it look like another
company is about to eclipse them? If so, it may be a sign of shifting industrydynamics.
 The Cassandras (they make accurate predictions, but are not believed) in the organization are a
consistently helpful element in recognizing strategic inflection points. Although they can come
from anywhere in the company, Cassandras are usually in middle management. Often they
work in the sales organization. They usually know more about upcoming change than the
senior management because they spend so much time “outdoors” where the winds of the real
world below in their faces.

http://www.vedpuriswar.org/book_review/only_the_paranoid_survive.pdf
There is no substitute for knowing the
business
• Maurice Greenberg CEO, AIG, Inc., 1968-2005
• AIG’s legendary risk management was mostly in the
head of one man: Hank Greenberg
• He would get raw data. He made assessments.
• Extremely complex organization with hundreds of
subsidiaries
• What happened when Maurice Greenberg left AIG?
• The new CEO did not understand risks taken by
distant units. The culture did not support succession.
• AIG Collapse (word document)
Adapting to Change
 What new competitors are entering our industry?
 How are our customers changing?
 Are new technologies being developed or deployed
which present new opportunities or threats?
 Are we in the right businesses?
 How can a company identify change?
Sole Proprietorships Need to Plan
 Example sidewalk vendor in Bangkok
 Rents space in front of a business
 Buys food for cooking and resale
 Has a helper, or two
 Owns some basic equipment, purchased with family funds
 Skilled cook, good location, good price = many customers
 But:
 Business and family funds are comingled
 Revenue from business goes to family consumption
 Expenses are ‘lumpy’ (due only at certain times)
 Problem arises when bills for rent or supplies are due, when equipment needs
maintenance or replacement, or at payday
 The business environment changes
 Need to understand resources of the business and marketing
 If co-existence is the aim, still have “5 Forces” long term issues
External Opportunities and Threats
 Analysis of Trends
 Social, Economic, Demographic
 Cultural
 Political, Legal, Governmental
 Technological
 Competitors
 Legal and Regulatory changes affect how business can operate
and where they can find profit
 Lobbying seeks to influence government to steer the direction
of change (or to build moats)
 Larger companies may have people designated to monitor
external threats and opportunities
Ch 1 -17
Internal Strengths and Weaknesses
 Controllable activities performed especially well or poorly
 Determined relative to competitors
 Typically located in functional areas of the firm
 Management
 Marketing
 Finance/Accounting
 Production/Operations
 Research & Development
 Management Information Systems
Ch 1 -18
Competitive Advantage
 Cash can be a competitive advantage
 Fewer fixed assets may be a competitive advantage
 Less debt
 More flexibility
 Anything that a firm can do especially well (or is perceived to do
very well) compared to competitors
 No competitive advantage lasts forever – continuous innovation
 Sustained competitive advantage
 Continually identifying and adapting to change
 Product innovation is often purchased
 Success is often a trap – complacency and entrenched interests
Long Term Objectives and Milestones
 Long-term objectives are specific results required to achieve the
company mission – strategies are the means by which objectives are
reached
 Strategy implementation requires resource allocation decisions and
annual objectives
 Annual objectives are milestones required to reach longer term objectives
 These are quantifiable and prioritized
 Annual objectives form the basis for resource allocation decisions
 Strategy implementation requires enlisting the support of diverse
individuals
 All areas of an organization participate in annual objectives
 Policies guide recurring situations – these state expectations of employees
and managers
Ch 1 -20
Commonly Used Business Idioms
From “Market Leader ”
 Goldman’s executives are on the warpath about a book. (very angry)
 Adversaries will do battle in court. (fight)
 If Apple loses the court case, that’s half the battle. (the rest is easy)
 That company has had a running battle with the patent office. (series of arguments)
 Samsung has stuck to their guns about patent invalidity. (maintained their point of




view)
They are up in arms about vague patents. (angry and ready to fight)
Management moved the goalposts for our bonus pool. (changed their decisions or aims)
Samsung hedges its bets by creating alternate designs. (reduces chances of failure)
The odds are stacked against us in this dispute. (there are many difficulties)
1) The Humble Beginning of a Legend

In early 1781, Revolutionary War militia leader Francis Marion and his men were camping on
Snow's Island, South Carolina, when a British officer arrived to discuss a prisoner exchange

According to a legend that grew out of the meeting, the British officer was so inspired by the
rebels’ resourcefulness and dedication to the cause—despite their lack of adequate provisions,
supplies or proper uniforms—that he promptly switched sides and supported American
independence.

Francis Marion had experience in the French and Indian War during the 1750s. The Cherokee
Indians he fought used the landscape to their advantage. They concealed themselves in the
Carolina backwoods and mounted devastating ambushes. Two decades later, Marion would apply
these tactics against the British.

After the Battles of Lexington and Concord on April 19, 1775, the Provincial Congress voted to
raise three regiments, commissioning Francis Marion a captain in the second. When he saw
combat during the Battle of Fort Sullivan in June 1776, Marion acted valiantly.

For much of the next three years, he remained at his fort, occupying time by trying to discipline
his troops, whom he found to be a disorderly, drunken bunch insistent on showing up to roll
call barefoot. In 1779, they joined the Siege of Savannah, which the Americans lost.
http://www.smithsonianmag.com/history-archaeology/biography/fox.html#ixzz28IDAT21v
Francis Marion
With the American army in
retreat, things looked bad
in South Carolina. Francis
Marion took command of a
militia and had his first
military success that
August (1780), when he led
50 men in a raid against the
British. Hiding in dense
foliage, the unit attacked an
enemy encampment from
behind and rescued 150
American prisoners
http://www.smithsonianmag.com/history-archaeology/biography/fox.html#ixzz27eEVSMZW
“The Swamp Fox”

Though often outnumbered, Francis Marion's militia would continue to use guerilla
tactics to surprise enemy regiments, with great success. Because the British never
knew where Marion was or where he might strike, they had to divide their forces,
weakening them. By needling the enemy and inspiring patriotism among the locals,
Marion "helped make South Carolina an inhospitable place for the British. Marion and
his followers played the role of David to the British Goliath.“

In November of 1780, Marion earned the nickname he's remembered by today.
British Lieutenant Colonel BanastreTarleton, informed of Marion's whereabouts by an
escaped prisoner, chased the American militia for seven hours, covering some 26
miles. Marion escaped into a swamp, and Tarleton gave up, cursing, "As for this
damned old fox, the Devil himself could not catch him." The story got around, and
soon the locals—who loathed the British occupation—were cheering the Swamp Fox.
Read more: http://www.smithsonianmag.com/history-archaeology/biography/fox.html#ixzz27eBsb7IN
2) Apple has quietly created the world’s largest hedge fund worth $117 billion
By Brad Reed | BGR News

Apple has quietly created the world’s largest hedge fund worth $117 billion

Apple (AAPL) is not only the most profitable company in the world, but it also now
owns the world’s largest hedge fund as well. Zero Hedge reports that Braeburn
Capital, a Nevada-based asset management corporation that Apple founded
specifically to manage its cash, now has more than $117 billion in assets under
management, making it even larger than hedge fund giant Bridgewater that currently
has around $100 billion in assets under management.
As Zero Hedge notes, Apple has been very secretive about Braeburn’s investments
and activities and has kept the company’s profile decidedly low since “Apple for now
uses Braeburn primarily in its capacity to find legal tax loopholes all around the world
and avoid paying taxes.” What’s more, Zero Hedge says that Braeburn exists in a
sort of legal black hole where it has no reporting requirements and thus isn’t obligated
to disclose to anyone what it owns.


Sun Tzu “The Art of War”: “Warfare is based on deception. Attack the enemy where
he is unprepared, and appear where you are unexpected.”
News story : Copyright BGR News 2012.
What Do We Know About Apples Strengths and
Weaknesses?

Some widely known strengths
 Enormous financial resources
 Brand recognition
 High gross margin

Why is high gross margin a strength?

Weaknesses?
 Highly dependent on one product
 High stock market valuation

How would a competitor exploit Apple’s market valuation?
Business Strategy is Quantitative


Paul Kennedy did a history of economic change and military conflict
1500-2000
 Battles can be won or lost with brilliant maneuvers
 German generals especially effective because they were trained
and allowed to adapt to field conditions
 Wars are ultimately a matter of resources
Businesses win or lose according to resources they are able to
employ
 We will look at balance sheets and income statements
 What are our competitors’ resources?
 What are our own resources? Potential resources?
 A strategic plan should allow flexibility to adapt to changing
conditions
Integrating Intuition & Analysis
• The strategic management process attempts to organize
quantitative and qualitative information under conditions
of uncertainty (Fred David)
• Strategy can be a formal planning process or informal
• Intuition is based on:
– Past experiences
– Judgment
– Feelings (often the ego leads to poor judgment)
• Intuition is useful for decision making in conditions of:
 Great uncertainty
 Little precedent
 Highly interrelated variables
 Several plausible alternatives
• Intuition and analysis complement each other
Excerpts from Reuters, 15-10-2012










(Reuters) - Renault and Nissan plan to step up cooperation and double annual savings from
their car making alliance to 4 billion euros ($5.2 billion) in 2016, sources with knowledge of the
plans said.
Renault shares rose as much as 9.8 percent to 37.725 euros on the news.
Carlos Ghosn, head of both carmakers, outlined the new goal at an internal presentation to
Renault and Nissan managers, people who attended the Sept 25-26 meeting said.
"Ghosn said we need to seek further synergies to get to double where we are today," an alliance
executive said.
In parallel with their operational savings push, Renault and Nissan are reviewing the cross
shareholdings underpinning their 13-year-old alliance, people with knowledge of the matter said.
Renault currently holds a 43.4 percent stake in its larger Japanese affiliate, which in turn owns 15
percent of Renault.
The companies would not comment on savings goals or the "shifting pendulum of speculation
about the alliance's corporate structure", a Renault-Nissan spokeswoman said.
"We seek more and more synergies every year," she added.
To meet the new goal, the allied carmakers would centralize more activities under their joint
holding company, Renault-Nissan BV, sources said.
The Dutch-registered venture, which already runs some purchasing and logistics operations for
both companies, will extend into new markets such as Russia and broaden its remit in back-office
functions such as information services, they added.
Companies adapt and strategies evolve

Some companies frequently commission
strategic plans



Large bureaucratic organizations tend to put plans on
a shelf
Plans and strategies change, but the organization fails
to execute
Others seize opportunities or create them


Executives (strategists) know their business – they keep a model
of the business in their head – and monitor the environment
They assess the environment for opportunities, then execute
(new resources, regulations, markets, changing competitive
landscape)
How Wells Fargo became the Most
Successful Bank Outside China

Highly analytical





Refused opportunities that seemed too risky
Retrenched when necessary (as part of strategy)
Identified sound business opportunities
Adapted to banking’s strategic inflection points
Executed flawlessly




Opportunities arose in 2008 crisis
Did not rush into deals
Won the bidding for a huge distressed bank
Deal gave the bank nationwide presence
Struggling with change
What do you do if a gorilla moves in?
 What would a small coffee chain do after Starbucks moves in? (NY
Times article “Struggling Against a Venti Starbucks Tide” 24-10-12)
 Go out of business?
 Ignore the change?
 Assess the situation?
 Most cases look at competition from the Starbucks perspective
 Try looking at how to survive or thrive among the gorillas
 Starbucks, Apple, Intel all have vulnerabilities
 Legal challenges, regulatory challenges, technological challenges
 Segments ignored or changing consumer preferences
 Their own high margins


Andy Grove famously said “Success breeds complacency. Complacency breeds
failure.” and worried about threats from below
Apple’s competitors grow in markets Apple will not serve (such as India)
 Niche strategies ‘fly under the radar’ of big companies
For October 22nd


Get a copy of the class material
Scan David pages 74-89