STRATEGIC MANAGEMENT
INTRODUCTION
1 WHAT IS STRATEGY?
What are important elements to develop a strategy?
1) Longterm performance of companies
e.g. Ryanair came from nothing grown into the biggest airline of Europe
2) Positioning how to position as an organisation within your industry?
e.g. Ryanair low cost turned out to be a good positioning compared to competition
3) Choosing your target market = about customer market + industry market
4) Your resources and capabilities: what can you do with these compared to competition?
e.g. Apple developed iPhones so that they could offer customers apps
Google sold smartphones so that customers would start using Android
5) Globalization
6) Technology convergence if technology converges, how would that fit into your strategy?
e.g. Amazon + Wholefoods go together Apple is small player in online retailer
= goes in different direction (car market)
7) Irreversibility of decisions: important/strategic decisions should be considered carefully
e.g. Airbus invests in development new type airplane 1 vision = long-distance planes
Boeiing let Airbus go in this segment focus on point-to-point vehicles (faster)
8) Sustainability: strategy should be sustainable over time in order to remain in the market
9) Non-market strategies = more and more important
e.g. Uber vs taxis a lot of problems with taxi companies = political fight in ≠ countries
10) Communities: “How to involve consumers + suppliers?” = stakeholders!!
e.g. NASA put problems on forum retired engineer came up with new, better algorithm
11) CSR: companies are punished for certain actions and rewarded for others
!! not only profitability is important
e.g. AirBnb started a short term housing during crisis situations, such as flood
e.g. oil from oil well came in the sea = dramatic = almost bankruptcy
12) Leadership, communication, alignment
“The master plan is build sports car, use that money to build affordable car, use that money
to build an even more affordable car + while doing this, provide zero emission electric power
generation options” – Elon Musk
= communication even before they sold 1 car
1
,2 WHAT IS A STRATEGIC DECISION?
! Interdependence of strategic decisions Coherence (cross section)
A. Internal coordination with other decisions = necessary to achieve
Consistency (over time)
Fit & trade-offs (Porter, 1996): decisions on 1 level have impact on other levels
e.g. decisions marketing have consequences for decisions R&D (coherence)
Hard to reverse decisions with important commitment effect (Ghemawat, 1991)
- Size of the investment
- Timing of the decisions
B. External interdependence: decisions also affect other players (customers, suppliers…)
e.g. Apple cut off access of developers created problems for Facebook
o Small number of players
o Game theory: complete, contingent action plan = Cournot, Nash… (action-reaction)
Strategic decision (in game theory) = investigated or announced as part of the optimal strategy
= For everything that can happen in a game, we have a strategy
Formalization:
- Assume different players with different activities who have to take decisions for department
- Players make decisions with only “local” information = max return from their individual decision
Standalone Value of a decision (A or B): α non-coordination
= best decision for you department
Interaction Value of a decision (A or B): γ coordination
if decisions = complements need coordination + select same value as other decision
= complementary decisions create value with other departments
- Example: 3 Decisions C1 (Product Development), C2 (Marketing), C3 (Operations)
Ex: interaction value γ 21=0,8 = probably not best decision for product development
Probability that random selection
of a decision gets it right = zero
Analysis: which decision is strategic?
Strategy = set of decisions announced or investigated by strategist
CASE 1 No investigation/announcement each participant chooses locally optimal decision
payoff R = ∑ α k =1,2
CASE 2 Strategist investigates and announces: “C2”
P2 can’t align with other decisions and thus chooses its locally optimal decision
P1 also chooses locally optimal decision (cause α 1> α any alignment )
P3 can now choose locally optimal decision with payoff 0.1
align with C2 with payoff 0.8 which is higher
payoff now becomes 0,3 + 0,8 + 0,8 = 1,9 value of this announcement = 0,7
CASE 3 Strategist investigates and announces: “C1”
payoff = 0,8 + 0,8 + 0,8 = 2,4 = optimal strategy
2
, Strategy = valuable if alignment – coordination is needed
! Value of strategy is in the coordination = interdependence/interaction coordination value
BUT
- What if the strategist is only correct with certain probability?
Reliability of strategy: how sure are we that ‘marketing’ will realize this outcome?
higher reliability = higher value of strategy focus on more stable factors
Irreversibility (by itself) ≠ make strategic but makes strategy more valuable
take irreversible decisions strategically coordinate other decisions with this
Option to commit makes decision more strategic
- What if decisions interact with other players in the market?
e.g. Tesla = make sports car first – make new car with the revenues from this
Once decision is announced other decisionmakers know which decisions to take
BE DIFFERENT: try to differentiate = creative aspect in the development of strategy (analysis ≠ sufficient)
3 STRATEGY AND VISION
Vision and mission ≠ strategy
MISSION = statement explaining why a company exists
e.g. Coca-Cola = inspire moments of optimism, refresh the world…
does not tell much about what the company wants to do
Vision gives more direction for the future goals
VISION = what leaders want the organization to become
e.g. Coca-Cola = people – portfolio – partners – planet – profit – productivity
= be a highly effective, lean and fast-moving organization (productivity)
still does not say anything about what Coca Cola is going to do in the next years = PHASE 2
= develop a strategy that will realise vision
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 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
2 aspects
1) Future: about a choice you make for the future (which can be adjusted)
2) Framework: bring everything together (not only decisions top manag) = interdependence
! not everything = a strategic decision only those that help make other decisions
3
INTRODUCTION
1 WHAT IS STRATEGY?
What are important elements to develop a strategy?
1) Longterm performance of companies
e.g. Ryanair came from nothing grown into the biggest airline of Europe
2) Positioning how to position as an organisation within your industry?
e.g. Ryanair low cost turned out to be a good positioning compared to competition
3) Choosing your target market = about customer market + industry market
4) Your resources and capabilities: what can you do with these compared to competition?
e.g. Apple developed iPhones so that they could offer customers apps
Google sold smartphones so that customers would start using Android
5) Globalization
6) Technology convergence if technology converges, how would that fit into your strategy?
e.g. Amazon + Wholefoods go together Apple is small player in online retailer
= goes in different direction (car market)
7) Irreversibility of decisions: important/strategic decisions should be considered carefully
e.g. Airbus invests in development new type airplane 1 vision = long-distance planes
Boeiing let Airbus go in this segment focus on point-to-point vehicles (faster)
8) Sustainability: strategy should be sustainable over time in order to remain in the market
9) Non-market strategies = more and more important
e.g. Uber vs taxis a lot of problems with taxi companies = political fight in ≠ countries
10) Communities: “How to involve consumers + suppliers?” = stakeholders!!
e.g. NASA put problems on forum retired engineer came up with new, better algorithm
11) CSR: companies are punished for certain actions and rewarded for others
!! not only profitability is important
e.g. AirBnb started a short term housing during crisis situations, such as flood
e.g. oil from oil well came in the sea = dramatic = almost bankruptcy
12) Leadership, communication, alignment
“The master plan is build sports car, use that money to build affordable car, use that money
to build an even more affordable car + while doing this, provide zero emission electric power
generation options” – Elon Musk
= communication even before they sold 1 car
1
,2 WHAT IS A STRATEGIC DECISION?
! Interdependence of strategic decisions Coherence (cross section)
A. Internal coordination with other decisions = necessary to achieve
Consistency (over time)
Fit & trade-offs (Porter, 1996): decisions on 1 level have impact on other levels
e.g. decisions marketing have consequences for decisions R&D (coherence)
Hard to reverse decisions with important commitment effect (Ghemawat, 1991)
- Size of the investment
- Timing of the decisions
B. External interdependence: decisions also affect other players (customers, suppliers…)
e.g. Apple cut off access of developers created problems for Facebook
o Small number of players
o Game theory: complete, contingent action plan = Cournot, Nash… (action-reaction)
Strategic decision (in game theory) = investigated or announced as part of the optimal strategy
= For everything that can happen in a game, we have a strategy
Formalization:
- Assume different players with different activities who have to take decisions for department
- Players make decisions with only “local” information = max return from their individual decision
Standalone Value of a decision (A or B): α non-coordination
= best decision for you department
Interaction Value of a decision (A or B): γ coordination
if decisions = complements need coordination + select same value as other decision
= complementary decisions create value with other departments
- Example: 3 Decisions C1 (Product Development), C2 (Marketing), C3 (Operations)
Ex: interaction value γ 21=0,8 = probably not best decision for product development
Probability that random selection
of a decision gets it right = zero
Analysis: which decision is strategic?
Strategy = set of decisions announced or investigated by strategist
CASE 1 No investigation/announcement each participant chooses locally optimal decision
payoff R = ∑ α k =1,2
CASE 2 Strategist investigates and announces: “C2”
P2 can’t align with other decisions and thus chooses its locally optimal decision
P1 also chooses locally optimal decision (cause α 1> α any alignment )
P3 can now choose locally optimal decision with payoff 0.1
align with C2 with payoff 0.8 which is higher
payoff now becomes 0,3 + 0,8 + 0,8 = 1,9 value of this announcement = 0,7
CASE 3 Strategist investigates and announces: “C1”
payoff = 0,8 + 0,8 + 0,8 = 2,4 = optimal strategy
2
, Strategy = valuable if alignment – coordination is needed
! Value of strategy is in the coordination = interdependence/interaction coordination value
BUT
- What if the strategist is only correct with certain probability?
Reliability of strategy: how sure are we that ‘marketing’ will realize this outcome?
higher reliability = higher value of strategy focus on more stable factors
Irreversibility (by itself) ≠ make strategic but makes strategy more valuable
take irreversible decisions strategically coordinate other decisions with this
Option to commit makes decision more strategic
- What if decisions interact with other players in the market?
e.g. Tesla = make sports car first – make new car with the revenues from this
Once decision is announced other decisionmakers know which decisions to take
BE DIFFERENT: try to differentiate = creative aspect in the development of strategy (analysis ≠ sufficient)
3 STRATEGY AND VISION
Vision and mission ≠ strategy
MISSION = statement explaining why a company exists
e.g. Coca-Cola = inspire moments of optimism, refresh the world…
does not tell much about what the company wants to do
Vision gives more direction for the future goals
VISION = what leaders want the organization to become
e.g. Coca-Cola = people – portfolio – partners – planet – profit – productivity
= be a highly effective, lean and fast-moving organization (productivity)
still does not say anything about what Coca Cola is going to do in the next years = PHASE 2
= develop a strategy that will realise vision
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 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
2 aspects
1) Future: about a choice you make for the future (which can be adjusted)
2) Framework: bring everything together (not only decisions top manag) = interdependence
! not everything = a strategic decision only those that help make other decisions
3
