DQ

by Apple

No credit for any DQ’s subjects covered during class or in the PPT.
You are to use eitherthe class reading assignment or current events BUT they need to address Strategy issues. The purpose is to drive conversations, which we will use in breakout sessions.
Example of a good DQ’s:
The makeup/cosmetic industry is an example of ‘oligopolistic’ competition, mainly because of huge M&A’s by dominant firms such as Shiseido, Estee Lauder, and L’Oreal, (over 180 brands are owned by 7 companies). Although M&A’s can help reduce the C in V-C economic value creation, sometimes M&A’s can also reduce shareholder value creation due to the notorious reputation of these dominant firms. For example, Estee Lauder is notorious for the chemicals they put into their makeup, which turns many consumers away from their brand. However, sometimes these customers find that alternative brands are acquired by Estee Lauder, which conflicts with certain brand strategies, missions, visions, and core values. Nars used to be a vegan-friendly brand until it was acquired by Shiseido and many consumers have stopped using Nars as a result. How can brands address this issue of conflicting missions, visions, and core values during M&A’s? During the past summer I worked as an intern in the accounting department of a commercial real estate firm. The last day of my internship, my manager conducted a Exit Interview with me. During the interview, he asked me if there were any employees in the office that were “not working as hard as they should”. At the time, I was put off by this question and I did not answer it because I didn’t want to throw anyone under the bus. Is this a normal question that managers ask their employees?

Chapter 1

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What Is Strategy?
© 2021 McGraw Hill. All rights reserved. Authorized only for instructor use in the classroom.
No reproduction or further distribution permitted without the prior written consent of McGraw Hill.

Because learning changes everything.®

LEARNING OBJECTIVES
Explain the role of strategy in a firm’s quest for competitive advantage.
Define competitive advantage, sustainable competitive advantage, competitive disadvantage, and competitive parity.
Assess the relationship between stakeholder strategy and sustainable competitive advantage.
Conduct a stakeholder impact analysis.
Explain the Analysis, Formulation, Implementation (AFI) Strategy Framework.

Strategy
A set of goal-directed actions a firm takes to gain and sustain superior performance relative to competitors.

To achieve superior performance, companies compete for resources:
New ventures: financial and human capital.
Existing companies: profitable growth.
Charities: donations.
Universities: the best students and professors.
Sports teams: championships.
Celebrities: media attention.
Students: Best cheating practices

Tesla, a new entrant in the automotive industry, is competing for customers with established U.S. companies such as GM, Ford, and Chrysler and also with foreign automakers Toyota, Honda, Nissan, Hyundai, VW, Audi, Porsche, Mercedes, and BMW, among others.
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A Good Strategy Is Based on Three Elements
1. A diagnosis of the competitive challenge.
Analysis of the firm’s internal and external environments.

2. A guiding policy to address the competitive challenge.
Formulation.
Results in corporate, business and functional strategy.

3. A set of coherent actions to implement the firm’s guiding policy.
Implementation.

Crafting a Good Strategy at Tesla
The Competitive Challenge:
Tesla must manufacture attractive and affordable vehicles using its new technology.
It also needs the required infrastructure for electric vehicles.
A Guiding Policy:
Tesla is building cost-competitive mass-market vehicles.
They have made significant investments in lithium-ion battery production.
They have just broken ground for another factory in Shanghai, China.
Coherent Actions:
Tesla is attempting to ramp up production volumes to achieve economies of scale.
Tesla has made some of its proprietary technology available to the public.

Overview
Tesla is an American manufacturer of all-electric cars.
In 2017, Tesla Inc.’s market cap of > $50 billion.
This was an appreciation of more than 1,100 percent over their IPO.
How can a California startup achieve a
market valuation that exceeds that of GM?

The answer: Tesla’s Secret Strategy

He attacked the auto industry by going after ALL ELECTRIC cars so he did not face the same challenges of a gasoline car manufacturer would have encountered…Disruption

Their Startup Master Plan
Build sports car.
Roadster – $110K
Use that money to build an affordable car.
Model S – $73.5K
Model X – $100K
Use that money to build an even more affordable car.
Model 3 – $35K
While doing above, also provide zero emission electric power generation options
Don’t tell anyone.

https://www.tesla.com/blog/secret-tesla-motors-master-plan-just-between-you-and-me

Advertisers value how Twitter can deliver their ads in real time. In one famous episode, when a blackout halted the 2013 Super Bowl for over half an hour, Nabisco promoted Oreo cookies by tweeting, “Power out? No problem. You can still dunk in the dark.” Advertisers can also target their ads based on the user’s interests or location, the time of day, etc.

Questions to consider
Do you agree with the assessment that Elon Musk and Tesla successfully fulfilled their first master plan published in 2006?
Does Tesla have a good strategy? Why or why not? How do you know?
Describe the rationale behind Tesla’s new master plan. How does this new strategy help Tesla fulfill its vision? https://www.tesla.com/blog/master-plan-part-deux

Apply the three-step process for crafting a good strategy outlined in the chapter, (next slides).

“Master Plan, Part Deux” in its entirety is on Tesla’s blog: https://www.tesla.com/blog/master-plan-part-deux

Elements of a Good Strategy: Analysis
Diagnosis of the competitive challenge

Analysis of the firm’s internal and external environments

Vision: “accelerate the world’s transition to sustainable transport.”

Goal: zero-emission electric vehicles that are attractive and affordable

A good strategy needs to start with a clear and critical diagnosis of the competitive challenge. Musk, Tesla’s co-founder and CEO, describes himself as an “engineer and entrepreneur who builds and operates companies to solve environmental, social, and economic challenges.”5 Tesla was founded with the vision to “accelerate the world’s transition to sustainable transport.”

To accomplish this mission, Tesla must build zero-emission electric vehicles that are attractive and affordable. Beyond achieving a competitive advantage for Tesla, Musk is working to set a new standard in automotive technology. He hopes that zero-emission electric vehicles will one day replace gasoline-powered cars.

Elements of a Good Strategy: Formulation
Effective guiding policy backed by strategic commitments
Investments
Changes

Cost-competitive mass-market vehicle

$5b investment in lithium-ion battery plant in Nevada

To address the competitive challenge, Tesla’s current guiding policy is to build a cost-competitive mass-market vehicle such as the new Model 3 (this is also Step 3 in Tesla’s “Secret Strategy,” as discussed in the Chapter Case). Tesla’s formulated strategy is consistent with its mission and the competitive challenge identified. It also requires significant strategic commitments such as Tesla’s $5 billion investment in a new lithium-ion battery plant in Nevada, the so-called Gigafactory. Batteries are the most critical component for electric vehicles. To accomplish this major undertaking, Tesla has partnered with Panasonic of Japan, a world leader in battery technology.

Elements of a Good Strategy: Implementation
A set of coherent actions

Ramp-up of production volumes
Achieve economies of scale
Cutting edge robotics
Secure steady supply of batteries
Network of charging stations
Sharing of technology

Tesla appears to implement its formulated strategy with actions consistent with its diagnosis of the competitive challenge. To accomplish building a cost-competitive mass-market vehicle, Tesla must benefit from economies of scale, which are decreases in cost per vehicle as output increases. To reap these critical cost reductions, Tesla must ramp up its production volume. This is a huge challenge: Tesla aims to increase its production output by some 20 times, from 50,000 cars built in 2015 to 1 million cars per year by 2020. Tesla’s retooling of its manufacturing facility in Fremont, California, to rely more heavily on cutting-edge robotics as well as its multibillion-dollar investment to secure an uninterrupted supply of lithium-ion batteries are examples of actions coherent with Tesla’s formulated strategy. At the same time, Tesla is further building out its network of charging stations across the United States and globally. To fund this initiative, it announced that using the company’s charging network will no longer be free for new Tesla owners.

Have they succeeded?

Competitive Advantage
Superior performance relative to other competitors in the same industry or the industry average.

To assess competitive advantage, benchmark:
Compare the firm to competitors in the same industry.
Compare the firm to the industry average.

http://www.viddler.com/embed/c2343053/?f=1&autoplay=0&player=simple&disablebranding=0

In terms of stock market valuation, Tesla has appreciated much more in recent years than GM, Ford, or Chrysler, and thus appears to have a competitive advantage, at least on this dimension.

Instructors:

The digital companion to this book McGraw-Hill Connect has an animated video exercise on this section of the textbook. It provides more background with an analogy from track and field to further discuss competitive advantage. (LO 1-2).
13

Sustainable Competitive Advantage
A firm that is able to outperform its competitors or the industry average over a prolonged period.

Example: Apple (US smartphone industry):
Sustainable competitive advantage over Samsung.
Has lasted over a decade.

Apple, for example, has enjoyed a sustainable competitive advantage over Samsung in the smartphone industry for over a decade since its introduction of the iPhone in 2007. Other phone makers such as Microsoft (which purchased Nokia) and BlackBerry have all but exited the smartphone market, while new entrants such as Xiaomi, (showme) and Huawei (Wah we) of China are trying to gain traction.
14

How to Gain a Competitive Advantage
Provide goods or services that:
Consumers value more highly than those of its competitors
or
Are similar to the competitors’ at a lower price

Competitive Disadvantage & Competitive Parity
Competitive Disadvantage is a firm that underperforms its rivals and the industry average

Competitive Parity: two or more firms that perform at the same level.

Competitive disadvantage – Sprint in Wireless which is why it was bought by Tmo
Competitive Parity – Vz, Tmo and ATT

Can you think of any others?
16

Profitability and Market Share…
“…is the rewards of superior value creation and capture.”
Examples:
Tesla: electric vehicles address global warming
Spanx: shapewear changes women’s lives
Walmart: lowest prices for customers

Strategic Positioning
A unique position within an industry that allows the firm to provide value to customers, while controlling costs.
Value creation minus costs equal economic contribution.
The greater, the better.
Enhances the likelihood of competitive advantage.

Economic value creation is the difference between a buyer’s willingness to pay for a product/service and the firm’s total cost to produce it:

The amount of total perceived consumer benefits equals the maximum willingness to pay.

Is there much difference between a Macy’s brand polo and a Ralph Lauren polo shirt? $20 v. $85

Strategic Positioning Requires Trade-Offs
Managers must make conscious trade-offs.
How to allocate resources?
Which activities to pursue?
Example: the retail industry:
Walmart: cost leader – big box outlet, low prices.

Nordstrom: differentiator – professional salespeople, luxury setting.

Who is winning with Covid?
19

A Unique Strategic Position
A successful combination of strategic activities.
Competitive advantage has to come from:
Performing different activities or
Performing the same activities differently than rivals.

20
Strategic activities strengthen its position as cost leader.

Big stores, low overhead, low wages.

Example: Walmart’s strategic activities strengthen its position as cost leader: big retail stores in rural locations, extremely high purchasing power, sophisticated IT systems, regional distribution centers, low corporate overhead, and low base wages and salaries combined with employee profit sharing reinforce each other, to maintain the company’s cost leadership.

What Strategy Is Not
Grandiose statements:
“We will be number 1.”
“We will win.”
A failure to face a competitive challenge:
Blockbuster didn’t address Netflix, Redbox, Amazon Prime, and Hulu.
Operational effectiveness, competitive benchmarking, or tactical tools:
Examples: “pricing strategy,” “operations strategy,” “brand strategy.”
These are good policies or initiatives, but not a strategy.
4. Hope is not a strategy

Value Creation
Companies with a good strategy:
Provide products or services to consumers at an affordable price
Make a profit
Can provide benefits such as:
Education, infrastructure, public safety,
healthcare, clean water and air

Example: Strat failure can be expensive: once a leading technology company, Hewlett-Packard was known for innovation, resulting in superior products, (calculator, watches, PC’s, test equipment). The “HP way of management” included lifetime employment, generous benefits, work/life balance, and freedom to explore ideas, among other perks. However, HP has not been able to address the competitive challenges of mobile computing or business IT services effectively. As a result, HP’s stakeholders suffered. Shareholder value was destroyed massively. The company also had to lay off tens of thousands of employees. Its customers no longer received the innovative products and services that made HP famous.

Stakeholders
Organizations, groups, and individuals:
Can affect or can be affected by a firm’s actions.
Have an interest in the performance or survival of the firm.
Stockholders, employees (including executives, managers, and workers), and board members…internal
Customers suppliers, alliance partners, creditors, unions, communities, media, and governments…external

Not to be confused with Shareholders

Internal and External Stakeholders in an Exchange Relationship with the Firm
Exhibit 1.1

Access the text alternative for slide image.

Stakeholder Strategy
An integrative approach to managing a diverse set of stakeholders to gain and sustain competitive advantage.
Stakeholder management benefits firm performance:
Cooperative stakeholders reveal important information.
Increased trust lowers business transaction cost.
Can lead to greater adaptability and flexibility.
More predictable and stable returns.
Stronger reputation.

Target has gathered numerous awards that reflect its strong relationship with its stakeholders. It’s been named on lists such as best places to work, most admired companies, most ethical companies, best in class for corporate governance, and grassroots innovation. Since its founding, they’ve contributed 5 percent of its profits to education, the arts, and social services in the communities in which it operates and reached the milestone of contributing $4 million/week in 2012. To demonstrate its commitment to minorities/women, Target launched a program to bring minority- and women-owned businesses into its supply chain. Volunteerism and corporate giving strengthen the relationship Target has with its employees, consumers, local communities, and suppliers. These actions help Target gain competitive advantage as a retailer, (as long as the benefits T accrues from its stakeholder strategy exceed the costs of such programs.

A Decision Tool for Stakeholder Strategy
Stakeholder Impact Analysis helps to recognize, prioritize and address stakeholder needs.
Three important stakeholder attributes: power, legitimacy, and urgency:
Power: when the stakeholder can get the company to do something that it would not otherwise do, (Activist Shareholders)
Legitimate claims: perceived to be legally valid or otherwise appropriate.
Urgent claims: require a company’s immediate attention and response.

Unfortunately, this is sometimes a bad thing…Wholefoods went with Amazon vs. board stacking by activists
Zuckerberg did not consult the board when he bought Instagram…he had the authority and it worked out.
Uber stakeholders caused founder Travis K to step down.

Stakeholder Impact Analysis
Exhibit 1.2

Access the text alternative for slide image.

Unions, Shareholders, employees, communities

Boeing opened a new airplane factory in South Carolina to move production away from its traditional plant near Seattle, SCar is one of 28 states in the US that falls under the right-to-work law in which employees in unionized workplaces are allowed to work without being required to join the union. In contrast to its work force in Wash, the South Carolina plant is nonunionized, which should lead to fewer work interruptions due to strikes and Boeing hopes to higher productivity and improvements along other performance dimensions (like on-time delivery of new airplanes). In 2014, Boeing announced that its new 787 Dreamliner jet would be exclusively built in its nonunionized South Carolina factory. In 2020, circumstances are making that a reality.

Many companies incentivize top executives by paying part of their overall compensation with stock options. They also turn employees into shareholders through employee stock ownership plans (ESOPs). These plans allow employees to purchase stock at a discounted rate or use company stock as an investment vehicle for retirement savings.

The Pyramid of Corporate Social Responsibility

Access the text alternative for slide image.

Economic responsibilities are the foundational building block, followed by legal, ethical, and philanthropic responsibilities. Note that society and shareholders require economic and legal responsibilities. Ethical and philanthropic responsibilities result from a society’s expectations toward business. The pyramid symbolizes the need for firms to carefully balance their social responsibilities. Doing so ensures not only effective strategy implementation, but also long-term viability.

MS – Donated over $3B to people who can’t afford technology
Strbks – Shut down one day to address cultural sensitivity issues (Philly incident)
Obamacare – mandated 50+ emp needed to be provided healthcare, but some biz worked the system to get around it.

AFI Framework
Effectively managing the strategy process is the result of:
Analysis (A).
Formulation (F).
Implementation (I).
This framework:
Explains and predicts differences in firm performance.
Helps leaders formulate and implement a strategy that can result in superior performance.

The AFI Strategy Framework
Exhibit 1.4

Access the text alternative for slide image.

Case study – Does Twitter have a strategy?
Twitter is an online news and social networking site.
Market capitalization had fallen 50%.
($40 billion in 2014 to $20 billion in 2018).
(sametime FB quadrupled from $100B to $400B)
Competitive challenge: small user base limits advertising, competition has increased.
Guiding policy: no clear approach for growing user base.
Coherent actions: employees lack guidance, tradeoffs are difficult to reconcile.

Fast forward to 2020
Twitter is an online news and social networking site.

Market cap today has bounced back to $39B
Facebook at $785B
What changed?
Did they realize their strategy?
Competitive challenge: small user base limits advertising, competition has increased.
Guiding policy: no clear approach for growing user base.
Coherent actions: employees lack guidance, tradeoffs are difficult to reconcile.

Small group discussion – Is this valid today?

Choose another well-known firm.
Assign the competitive challenges and company guiding policies.
Search the internet for information about the firm’s actions.

As a group, discuss the following:
The key actions the firm has taken – do they seem to be coherent?
Does the firm demonstrate measures of a competitive advantage?
If yes, does it look to be sustainable?

Paper Airplane Exercise
Divide into assigned groups and create an airplane that will fly the farthest, consistently. (I am not looking for creativity by crumpling up the paper and tossing it)
All team members must participate in the design and manufacturing.
You can test your models and correct as needed.
15 minutes from design to final assembly.
Each team gets three throws.
No other guidelines are to be given…just do it!

What forms of Strategy did you employ?

Analyze, Formulate, Implement?

Competitive Advantage: Which team through it the farthest?
Sustained CA: Which team repeatedly through the farthest?

End of Main Content
© 2021 McGraw Hill. All rights reserved. Authorized only for instructor use in the classroom.
No reproduction or further distribution permitted without the prior written consent of McGraw Hill.

Because learning changes everything.®
www.mheducation.com

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