At least 6 page paper of company analysis related business strategy of Apple and its iPhone

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Lecture 09: Strategy Execution

Strategic Planning vs. Strategy Execution

Strategic Planning:

The process of articulating the firm’s strategy and the programs necessary to implement it

Includes both communicating the plan to employees, and offering opportunities for frequent feedback

Strategy Execution:

The substance of strategic actions and activities

Results from the decisions made by individual employees

Successful execution requires strategic planning!

Strategic Planning: Core Elements – Single Business

Starts with Problem Identification & Diagnosis

What is the opportunity or threat and why does it matter?

A good diagnosis: identifies the critical aspects of the situation.

Requires internal (organization) and external (industry, market, competitors) analysis.

Specifies a Mission that includes:

The Objective (ends): “the what” – with specific financial and operating goals that would demonstrate that the firm has realized its strategy.

The Scope (domain): “the where” to compete.

What customer segments, markets, geographies, industries, etc., do we compete in?

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3. Specifies the Sources of Advantage (means): “the how” – the unique value your firm will create.

Defines the strategic initiatives chosen to address the problem or opportunity.

Specifies how the strategic initiatives will improve the likelihood of achieving a temporary or sustainable advantage.

Specifies a set of coherent action plans to execute each strategic initiative.

Strategic Planning: Core Elements – Single Business

What can hinder the planning process? Decision-Making Biases

Exercise

You have a cake and a knife.

You are allowed to cut the cake 4 times in straight lines.

What is the maximum number of pieces that you could cut the cake into (in one minute)?

How many biases and assumptions influenced our thinking about this exercise?

Type of Bias	Definition
Myopia	Weighting short term over long term outcomes, controlling for a discount rate.
Sunk Costs	Continuing to invest in failing projects in hope of getting back the original investment…escalation of commitment.
Bias related to whether a decision is framed in terms of gains or losses	Tending to be risk seeking in terms of losses and risk averse in terms of gains (Prospect Theory).
Information availability	Valuing and using information simply because it is favored, most recent, or readily available.
Information anchoring	Overweighting information that appears first in the information flow.

Decision-Making Biases

What is Strategy Execution?

Strategy execution:

Building the resources and capabilities that lead to competitive advantage

Key goals:

Improve cost and value drivers

Create isolating mechanisms

Distinct from strategic planning

A relatively simple business with a valuable protected resource may not need much planning…

but it must execute!

Building a Sustainable Competitive Advantage (Figure 2.10)

Retaining Customers

Preventing

Imitation

Value Drivers

Cost

Drivers

Market Position Isolating Mechanisms

Superior (Value –Cost) Market Position

Defendable Market Position

Sustainable

Competitive

Advantage

Resources

Capabilities

Resources & Capabilities: Recap of Definitions & Characteristics

	Resources	Capabilities
Definition	An asset, may be observable or tradable, that contributes to producing a firm’s outputs.	Managerial and organizational skills that a company uses to organize & deploy its resources – transforming inputs into outputs.
Characteristics	Observable, tradable in the market Improves Value, Lowers Cost, or both Provides an advantage if difficult to imitate or substitute for	Unobservable and difficult to trade or price in the market Improves Value, Lowers Cost, or both Developed: by people through coordinated action; and independently of resources Less stable than a resource
Examples	Tacit or Intangible: human capital, brand, proprietary processes Tangible: natural resources, patent stock, distribution network, location	Tacit or Intangible: marketing capabilities, product development capabilities, forecasting capability

Linking Resources and Capabilities

Capabilities contribute to performance by taking advantage of key resources!

A firm’s expertise in exploiting a resource strongly influences how much it is worth to the company

Resource Complementarity:

Complementarity among a firm’s assets means they are more effective together than when used independently…

A useful barrier to imitation!

Makadok’s Model for Acquiring Resources

How can a firm become more profitable than competitors when bidding for a resource?

Have stronger complementarities between the resources of the firm and the resource being auctioned

Have stronger capabilities that increase the returns to the target’s resource

Develop a better forecast of the future economic returns to the resource (resource picking)

Capability Development (Figure 5.3)

Complementarity & Consistency within the Activity System

Control & Coordination

Systems

Compensation & Incentive Systems

Organizational Culture & Learning

Capabilities

Activities

Resources

Value & Cost Drivers

Isolating Mechanisms

Organizational Dimensions

Organizing Activities: Value Chain Framework

Primary activities: Activities specific to the

creation of the product or service.

Support activities: Activities that enable

the primary activities; support activities may enable multiple primary activities.

Organizing Activities: Activity Systems

Composed of interconnected components of a firm that contribute to, or detract from, the firm’s value and cost drivers.

The core of the system includes activities that significantly affect a firm’s V-C position.

Activity systems contain policies governing:

Value chain activities

Critical resources, such as technologies and brands

Product characteristics

Characteristics of the firm’s organizational structure and culture

Why is an Activity System useful? What insights can it provide?

Demonstrates how the above components relate to and reinforce each other in support of the firm’s strategy.

Vanguard’s Activity System in early 1997 (Figure 5.2)

Southwest Airlines’ Activity System

Source: Porter 1998,

http://bit.ly/19Dptaq

Organizational Dimensions of Strategy Execution

Complementarity and consistency among the firm’s resources, tasks and policies

All of the above should support of a firm’s market position

Control and coordination systems

Hierarchical Structures: Function, Geography, Customer

Compensation and incentive systems

Noise vs. Distortion

Culture and learning behavior

Strong vs. Weak Cultures

Complementarity vs. Consistency

Complementary resources and/or capabilities

Produce a more effective outcome together than independently

Examples:

Gucci’s brand and its artisan suppliers

Different regions of Wal-Mart’s distribution system

Consistency (Fit)

Resources or capabilities are jointly aligned with the requirements of the firm’s market position

Does not require a direct interaction

Example: The alignment of Vanguard’s entire activity system with its low cost position

Important Downside: High-consistency firms cannot change their market position!

Control and Coordination Systems

Combine the disciplines of Management, Finance, and Operations Research

Why do they matter for Strategy?

These systems are part of the foundation for building key capabilities…

…which allow the firm to execute its strategy to develop and defend a sustainable competitive advantage

Control Systems	Coordination Systems
Financial: determine how financial resources are allocated Operational: determine how materials and people are allocated across tasks and how task performance is measured.	Determine how projects will be executed across units. Examples of Coordination mechanisms: Standardized procedures Joint planning Liaison personnel Task forces with members from multiple activities. Teams that institutionalize the task forces Hierarchical referral

Types of Organizational Structure

Functional

Geographic

Customer-based

General Manager

Customer Segment I

Functions or Regions

Customer Segment II

Functions or Regions

Customer Segment III

Functions or Regions

General Manager

Marketing

Regions

Operations

Regions

R&D

Regions

General Manager

Region I

Functions

Region II

Functions

Region III

Functions

Traditional Forms of Organizational Structure

Functional Structure	Customer-based Structure	Geographic Structure	Matrix Structure
The activities of the firm are organized by function such as production, marketing, R&D, and accounting.	The activities of the firm are organized by well-defined customer segments.	The activities of the firm are organized by geography.	Form where there are multiple organizing dimensions, such as function and geography, and managers report along 2 hierarchies instead of one.

Rivals with different hierarchical structures build different kinds of capabilities.

Functional	Customer-based	Geographic	Matrix
Lower Costs: Reduced overhead Standardized procedures within functions Process innovation specific to functions Power over suppliers via scale advantages in purchasing Higher Value: Via development of expertise in each function (R&D, marketing, etc.) Growth: Centralization of new product introduction Investment in stronger technology platforms	Increased focus on unique characteristics of customer segments. Benefits may stem from a stronger understanding of: Unique marketing requirements (knowledge of customer industry) Unique customer preferences (e.g., products tied to unique practices in a segment)	Increased focus on the characteristics of different regions may increase Value or Lower Costs or both. Benefits may stem from access to: Unique local competitors Unique local suppliers Unique local customer preferences	Avoids problems of placing one organizing dimension (function) over another (geography or customer segment) – dimensions are roughly equal in importance. Provides professionals with a broader range of responsibility and experience.

Advantages of Organizational Structures

Disadvantages of Organizational Structures

Functional	Customer-based	Geographic	Matrix
Potential conflicts between local and corporate management  exposing inconsistencies in strategy.	Silos may emerge that make knowledge sharing and coordination challenging. Competition between units can lead to short term thinking.	Silos may emerge that make knowledge sharing and coordination challenging. Difficult to establish uniform performance standards.	Tensions between 2 reporting hierarchies can contribute to battles over resource allocation and policy formulation. Working relationships are more complex & decisions may take longer. More expensive to manage due to higher admin. overhead vs. single hierarchy structures.

Compensation and Incentive Systems

Employees must be compensated so that they contribute effectively to strategy execution.

Effective compensation systems achieve 3 goals:

Measure task outcomes related to the firm’s value and cost drivers.

Set appropriate targets for each outcome.

Reward managers for achieving these targets.

Designing Incentive Systems: Classic Problems

Controllability

Occurs when managers are unable to identify how much performance is due to individual skill and effort and how much is due to luck.

Alignment

Occurs when less important tasks are weighted more than they should be just because they can be measured.

Interdependency

Occurs when performance depends on the efforts of a team, making it difficult to identify individual contributions.

These problems

reflect

Noise and

Distortion in

compensation

systems.

Dilemmas of Noise and Distortion

Noise = measurement error

Controllability and interdependency increase noise that lowers the ability of management to measure current progress in achieving results.

Distortion = misalignment of measurement

Distortion increases through the improper weighting of tasks underweighting hard-to-measure activities and overweighting easy-to-measure activities.

Optimal system?

Low levels of noise and distortion…

but rarely achieved

Implication: There is an inevitable tradeoff between these dilemmas.

Tradeoffs in Noise & Distortion

Rewarding managers using:

Firm level performance metrics

Solves the alignment problem  reduces distortion

Increases problems of controllability and interdependency  increases noise

The reward system does not separate the active contributor from the free rider.

Individual performance metrics.

Reduces the controllability and interdependency problems  reduces noise

But, rewarding managers for performance on measurable tasks skews attention away from important activities such as interunit coordination  increases distortion

Pay-for Performance Systems

Classic Example -- Piece-rate pay: related to the quantity of output of a person over a period of time.

“Real-Life” Example – Chocolate Making on “I Love Lucy” https://youtu.be/ 8NPzLBSBzPI

Conditions for effective implementation of Pay-for Performance incentive systems	Problem addressed
Employees control the pace of production.	Controllability
Performance standards are perceived as fair.	Controllability
The firm absorbs some of the risk when there is significant uncertainty & employees are risk averse.	Controllability
Group members’ preferences are similar.	Interdependency
Cooperation and innovation are rewarded.	Interdependency
A lower bound on quality is explicit.	Alignment

Culture

Definition: The values and expressive behavior of employees as they direct thought and activity toward or away from the organization’s goals.

Strong Cultures: enduring, greater consistency in behavior of employees.

Weak Cultures: fragile, subject to fragmentation and violation of the understood rules of behavior.

Why don’t all firms aim to have strong cultures?

Requires significant investments in employee retention and team-building  too expensive if not essential to the firm’s strategy!

Learning

A firm’s culture also produces models for effective questioning and problem solving…

Essential for learning and adaptation!

Two types of problem solving

Single loop learning: working within the constraints of a problem or task to achieve a solution.

Necessary and sufficient to solve routine problems

Double loop learning: extends the problem solving process outside the problem or task’s domain & raises questions about the task parameters.

More important in rapidly-evolving industries!

Effective strategy execution requires the ability to engage in both types of learning!

Mini-Case: Students at “SMU”

Perspective 1: Singapore Management University

http ://youtu.be/3MV1ZUtwXaY

Perspective 2: Southern Methodist University

http://youtu.be/ hmGI0DcvqW4

What’s the best incentive system?

What outcomes do we care about?

How should we set targets?

How to distribute rewards?

Challenges:

Controllability

Alignment

Interdependency

REMOVE FROM HANDOUT

Use first 30 seconds of video 1, all of video 2

Key Questions of Strategy Execution

What are the key resources and capabilities underlying your value and cost drivers? How well do they complement each other?

Can you map your firm’s activity system? How consistent do you think your activities would be?

How is your firm organized structurally? Does this structure support the development of its key capabilities?

What metrics does your organization use to measure financial and operating performance? How are they aligned with your firm’s strategy?

Does your firm have a strong or weak culture? Do the characteristics of your culture contribute to strategy?