Strategic Flexibility

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Class 1

June

Class 1; Monday 3: Read Chapter 1: Strategic Management and Strategic Competitiveness AND Chapter 2: Chapter 2: The External Environment: Opportunities, Threats, Industry Competition, and Competitor Analysis

• Please introduce yourselves to the rest of the class using “virtual office” and start forming groups ASAP.
• First live session at 6PM

Chapter 1

This first Chapter offers a general framework explaining strategic management, the importance of strategic management and the different levels at which strategic management is applied. An important concept raised in this chapter is that of strategic flexibility which also implies the development of organizational learning structures. All of us as managers or aspiring managers are aware of the velocity with which our environment is changing which leads us to wonder how can we create an organization that is able to learn from this changing environment. In other words, as managers, how do we create organizational structures and policies in such a way as to allow for a process of continuous learning? After all, great managers come and go, but it is the learning of a firm through some type of evolution that will allow it to adapt and persevere over time. Therefore, it is our job, as managers, to develop such a structure and culture in order for our organization to continuously develop and improve (i.e., be flexible) both with us at the forefront as well as long after we have gone. The general model of strategic management offered in this text starts, as you can see on page 6, with an assessment of the external and internal environments. Based on this analysis, managers are able to develop a mission and create strategies that take advantage of opportunities and dodging threats by focusing on their strengths and attending to their weaknesses. Once a strategic plan is developed, one would assume that it’s all downhill from there… but all of us who have worked in managerial positions know that some of the greatest challenges are faced during the implementation of a plan. We know that corporate culture and politics are difficult to navigate, and that most projects are never accomplished within budget or during the time scheduled.

Next, you read in the chapter about two theories that explain above-average returns; the I/O model of above-average returns and the resource based view of above average returns. If you are anything like most of my graduate students, you are probably still trying to figure-out what in the world the authors are talking about and also quietly saying 'who cares about theories'; let me explain and see if I can get you thinking a little about this interesting topic. Have you ever noticed that different industries have different average returns? For example, you know that utility companies have steady cash flow but low ROI, we know that hotels tend to have an ROI of 11-13% or franchise restaurants 20% or bars 40% etc. etc etc... you can even use the risk/return models from your finance class (remember the CAPM?) to explain how investors expect greater returns from firms with greater volatility/risk. Anyway, the I/O model demonstrates (I use the term loosely) that a firms returns are, to a great extent, dependent on the industry they choose to compete in; does that make sense? Funny, it kinda makes you wonder the value of a manager!

The other theory that is explained is the resource-based view of the firm that postulates that firm competitiveness is based on the unique combination of resources that managers put-together/create... so, which theory do you believe in? Which theory best explains firms returns? Or, could it be that in reality returns are the result of a combination of both? According to your textbook:

The I/O model has been supported by research indicating:

• 20% of firm profitability can be explained by industry characteristics
• 36% of firm profitability can be attributed to firm characteristics and the actions taken by the firm
• Overall, this indicates a reciprocal relationship - or even an interrelationship - between industry characteristics (attractiveness) and firm strategies that result in firm performance

Another common topic mentioned briefly in the chapter is that of mission and vision statements. I don’t want to discuss these at length as I am sure you have heard a lot about these statements both in your educational as well as professional lives. However, I also understand that many people seem to find these concepts useless. I would like to offer just a brief comment on these statements on why I do believe that they are useful and important. I first confess that I have never had a mission or vision statement to guide my investments in the small businesses that I have started. The problem that resulted is that the businesses stopped growing and lacked a concrete strategy due to an unclear mission regarding what business I was in or where I saw my firm in the future. The problem this caused is that when I had a little extra money and searching in what to invest, I tended not to maximize my investment because I did not know what business I was in or where I saw myself down the road. For example, I had a motel, restaurant, bar, travel agency and some commercial real-estate. My question was always “and what should I invest in next? Am I in the motel business and therefore should continue building other motels, or should I go into the restaurant business and replicate my restaurant in other locations, or should I strengthen my travel agency exposure online? Because I do not have a clear picture of what I was or where I was going, I always had trouble allocating resources to focus my energy in one direction; I simply would invest in the next best thing that crossed my path.

One final important topic of the chapter is about stakeholders. While the importance of stakeholders should be obvious to us all, how many times have you seen that strategic decisions are made without consulting all stakeholders? All we have to do is read today's newspaper (WSJ) and we will surely see a fight/disagreements among powerful stakeholders jockeying for the power to direct the firms strategies in a certain direction. In short, when considering strategic options/directions, make sure to consider the multiple stakeholders and the very different interests.

Chapter 2

Chapter two, while very intuitive to grasp and understand, is possibly one of the most important chapters in this text. The reason I say this, is that the concept of environmental scanning is “logical” to all of us however, in practice, most people seem to be so caught-up in their day-to- day activities that having the time to sit-back and take a broader view of our surrounding environment and the tendencies evolving before us is a challenge. For both entrepreneurial ventures as well as the first step in developing corporate strategy, we need to scan the environment and become attuned to changes in the natural, societal, and task environments.             The environmental variables that we find on pages 43-51 may seem overwhelming, but we must be aware that not all of these variables are relevant for all businesses. Please keep this in mind while you are analyzing these variables for your homework assignments and for your strategic audit. What I will be looking for is that you identify relevant variables that might impact the firm in terms of creating opportunities and threats; I will be specifically focusing on your reasoning for focusing on the variables that you chose. In other words, I want you to choose few variables (5-7 from each category; i.e., sociocultural, technological) and analyze them in depth and furthermore formulate an argument as to why they are critical for your specific venture or firm. After identifying the specific variables, it is important that you qualitatively and quantitatively analyze the trends of those variables and the extent (a quantitative metric) to which those variables influence the industry in general and the firm you are analyzing in particular. For example, if after reviewing the firms annual report (10K) you notice that gas prices significantly affect the industry, you should then analyze by correlations, regressions and so forth, the extent of the effect on the industry. You should be able to state that for every $1 change in the price of oil, profit margins change by $$$. Furthermore, you should be able to determine how this trend/fluctuation affects the firms financials. Notice that by doing this, you will be able to create forecasts and hence well-informed strategies.             Another important take-away from this chapter is “Porter’s five forces model”. I am sure that this is not the first time you have heard of this model as it is incredibly notorious in both the academic as well as practitioner camps. What I would like to emphasize, because I have seen as a point of confusion on multiple occasions, is what exactly the model is explaining. Many people think that this framework is used to analyze how well a firm is doing within an industry or as a tool to compare the firm versus others within the industry. Porter’s forces was created as a tool to analyze industry attractiveness (remember the I/O model from last chapter). From this perspective we can see how understanding the threats of new entrants (by analyzing the barriers for entry), the bargaining power of buyers and suppliers, industry competition, the threat of substitutes, and the relative power of other stakeholders will influence a number of factors such as profit margins, return on investment, levels of investment required, R&D, volatility of cash flows among many other important factors. Keep in mind that this analysis requires both qualitative and quantitative assessment. For your assignments and strategic audit, please make sure to perform in-depth analysis for each of the forces. For example, when analyzing the competitive environment, make sure to analyze the number of competitors, their market shares and how those have changed over the years, and also how the competitive landscape in that industry has impacted industry profitability over the years...is profitability increasing or declining? An important concept in industry analysis is that of a fragmented versus consolidated industry. What is the importance of these two industry types for strategic decision-making? Maybe for some of you the answer is clear…. It is typically easier to enter into a fragmented industry where there are many smaller players allowing other firms to enter without much of a fight (divide and conquer right?). Fragmented industries tend to eventually gravitate towards more consolidated industries over time. The reason for this is that smaller firms will sooner or later fall-out because of their inability to compete, or be purchased by larger firms. Take a moment to think of what type of industry you are in with your current employer, and how that fact influences your firm’s strategic options.