Summary Strategic Management

STRATEGIC MANAGEMENT
1. WHAT IS STRATEGY?


Think of it as a puzzle, different elements to think about but they have to make sense together.
Also possible to think about it as a story in which different elements come together.

How does it make the organization successful in the long term? PLAN!

“Everyone has a plan ‘till they get punched in the mouth.” ~ Mike Tyson

Strategy & Gnomes, they collect underpants, they collect stuff, they do stuff, and they have an
outcome (profit), but how is this connected?

 Fase 1: Collect underpants.
 Fase 2: ?
 Fase 3: Profits!

We think of strategy as phase 2, how do we go from doing stuff to getting a long-term, successful
result? How you go from actions to results, everything in between is strategy.

AIRLINE INDUSTRY: STRATEGY IS LONG-TERM ORIENTED
“If you want to be a millionaire, start with a billion dollars and launch a new airline.” ~ Richard
Branson from Virgin Airlines

Ryanair has been really successful in an industry that is facing a lot of challenges. So, how has
Ryanair been able to consistently outperform other airline companies?

 They target different customers.
 Operating in small, secondary airports.
 Low traffic, faster turnaround.
 Going from point A to point B, they don’t offer connections.
 Their capital are their airplanes.
 They need to be in the air as much as possible.

Everything that Ryanair does, is consistent, it all fits. Their puzzle fits and the business model is
capturing value.

ELON MUSK – TESLA
“So, in short, the master plan is:

1. Build sports car.
2. Use that money to build an affordable car.
3. Use that money to build an even more affordable car.
4. While doing above, also provide zero emission electric power generation options.”

 He knew exactly what he wanted to do, and he got it done.

1

,WHAT IS STRATEGY?
 The choice of a future for the organization and of a way to reach that future, understood as the
framework that coordinates, unifies and integrates the company’s decisions and actions.
 A choice or a series of choices. You have to make decisions, and allocate resources
accordingly.
 It’s a framework, especially important in large organizations for coordination. You
need to make choices according to the framework.
 For profit organizations, add: and positions a business in an industry so as to generate
superior financial returns over the long run.
 Smallest set of choices to optimally guide (or force) other choices.

Can you write down your strategy in 35 words?

 Because, how can you guide people if you can’t describe your strategy in a few sentences?

Elements of your strategy statement:

 Objective
 Scope
- What
- Who
- Where
- How
 Competitive advantage

Example: “The strategy of Ryanair is to achieve the lowest-cost position in the airline industry so that
it can offer the lowest fares to price-conscious European travelers, by means of spartan service, high
capacity utilization, and high-powered incentives.”

Characteristics of strategy:

 Uniqueness: Be different!
 Trade-offs
- E.g. between costs and quality
- You want to be on frontier.
- On the frontier, there are trade-offs.
 Fit – Coherence – Consistency
- Important decisions for direction of organizations.
- Interdependence:
 Internal coordination with other decisions is necessary to achieve coherence
(cross-section) and consistency (over time).
- Fits and trade-offs.
- Hard to reverse decisions with important commitment effect.
- If a decision is easy to reverse, it is not a strategic decision.
 Size of the investment
 Timing of the decisions
 External interdependence: reaction from competitors or other players
(complementors, suppliers, customers…).
- Small number of players.

2

, - Game theory: a complete contingent play of action.

WHICH DECISIONS ARE STRATEGIC?
Definition: A decision is “strategic” if it is investigated or announced as part of the optimal strategy.

Different players make decisions, have only “local” information, and, maximize the return from their
individual decision – no communication.

 Standalone value of a decision (A or B): α
 Interaction value of a decision: If decisions are complements, they need to be coordinated and
select the same value as the other decision (A or B): γ
 Probability that random selection of a decision gets it right is zero. Investigation by strategist
is costly.

Example: 3 Decisions C1 (Product development), C2 (Marketing), C3 (Operations).




Analysis:

 Strategy is a set of decisions announced or investigated by a strategist.
 Absent any investigation or announcement, each participant will choose locally optimal
decision (standalone value). This results in payoff R = ∑ α K = 1.2.
 If strategist investigates and announces, say C2.
- P2 can’t align with other decisions and thus chooses its locally optimal decision.
- P1 also chooses locally optimal decision as her payoff α, is larger than from any
alignment.
- P3 can now:
 Choose locally optimal decision with payoff 0.1.
 Align with C2 with payoff 0.8 which is higher.
- So the payoff becomes 0.3 + 0.8 + 0.8 and the value of this announcement is 0.7.
 The optimal strategy is to investigate and announce C1.
- With payoff of 0.8 + 0.8 + 0.8 = 2.4
 Strategy is valuable if alignment – coordination is needed.
 What if the strategist is only correct with certain probability?
- Reliability of strategy: focus on more stable factors
- Irreversibility (by itself) does not make a decision more strategic but makes strategy
more valuable.
- Option to commit makes decision more strategic.
 What if decisions interact with other players in the market?
3

, MODELS:
Choice of a future:




Who does what for strategic decision-making?




 Top management is involved in every decision, except in the strategy approval which goes to
the
board of directors.




4