University of Massachusetts Lowell

Manning School of Business

Strategy Formulation and Implementation
MGMT.6910

Class Notes Week 1 Introduction to Strategy

Trying to predict the future is like trying to drive down a country road
at night with no lights while looking out the back window.
Peter Drucker

Table of Content

What we did last week.........................................................................................................1

What we will do this week...................................................................................................1
Assignments for this week...................................................................................................2
Reading............................................................................................................................2
Discussion Board.............................................................................................................2
Chat..................................................................................................................................3
Individual assignments....................................................................................................3
Group Projects.................................................................................................................3
An Introduction....................................................................................................................3
Syllabus and Course Requirements...................................................................................10
Overview of Strategy Process............................................................................................10
Strategy Planning Concerns...........................................................................................12
Market Vs Opportunity Share........................................................................................12
Tops Down Vs Bottom up Strategy...............................................................................13
Impact of Environment..................................................................................................13
Importance of Strategy Execution.................................................................................14
Integration......................................................................................................................14
Business Basics..................................................................................................................16
Mission/Vision...............................................................................................................17
Text Book Chapter 1 Highlights........................................................................................19
Additional Points on Strategy........................................................................................20
An Example: IBM..............................................................................................................21

What we did last week

Hope you are enjoying winter and staying warm! Ready to finish your last mile?

What we will do this week

Welcome to MBA Strategy Formulation and Implementation on line course. This is your
final stop! You have made it! Congratulations!
During this first week of our online learning experience, we will introduce the subject of
Strategy (and its execution), discuss the Syllabus, course requirements and other course
logistics considerations.

General format of each week's notes will start with What we did last week, What we
will do this week and Assignments. Remainder of these Class Notes will include
specific discussion of topics included in Class Schedule.

Assignments for this week

Reading
Read Class Notes 1
Read Chapter 1

Discussion Board
Question Assigned to
Q. 1 Review P&Gs income and balance sheet statements (see my email)
for the last 5 years (you will get this data from their
website) and comment on trends in revenue, gross
margins, R&D, SG&A, cash position and debt (it is
suggested that you convert income statements to a
common size statement, that is all line items as % of
revenue). Include in your comments what you see as their
strategy and how do you think they are doing.
Post question(s) for instructor and/or comments to ALL
share with all

Chat
Our regular chats will be a Chat Session on Sunday from 8:00 to 9:00 AM for
Section 061/AB1 and 9:00 to 10:00 AM for Section 062/AB2. Do plan to attend.

Week 1 Chat is recorded, please review it.

Individual assignments
Your individual assignment 1 (Unilever) is due week 5, but it is available on Blackboard
for you to review, we will discuss during week 3 chat session

Group Projects
We have one (1) group project: a Business Simulation (using Business Strategy Game
BSG). You will need to complete student information form (in Blackboard) and submit it
to me as instructed. I will need this information to form groups.
Class notes begin
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*

An Introduction
Let us start by taking a look at a few well known companies and try to understand their
businesses, similarities and differences among them. This will set the stage for our
discussions over the next 10 weeks.

First we will start with 2 very familiar companies: Microsoft and Apple. Rivalry between
these 2 companies goes back to early 1980s. At this point, we will just focus on their
performance in last 10 years, and only looking at their income statements. Below you will
see data from 2000 to 2011 for these 2 companies.
What do we see here? Looking at a few key numbers, we see that Microsoft has slowed

down, where as Apple has recorded

explosive revenue growths over the
period. Why? What is Apples strategy?
What is Microsoft strategy? As a % of
revenue, Microsoft is spending about 6
times the rate of Apple in R&D. Is
Microsoft R&D productivity very low
compared with Apple? Obviously, we
know that Apple has entered in new
markets in last 10+ years, whereas,
Microsoft has not successfully ventured
in any new markets. Strategy of
creating new markets as opposed to
staying in same (probably maturing)
markets? Or, not being able to gain
from R&D, a strategy execution issue?
There are many more questions that one can raise, but for now, we will leave at just these
few questions and will revisit later

Next let us look at Maytag Corporation, which I am certain you all know. Financial data
below are prior to Whirlpool acquiring Maytag.

What do we observe from their Income Statement above?

Rather than looking at all numbers, let us just take a look at their revenues and gross
profit over the years. We see that revenues went up in 2001 and 2002 and then leveled
off; whereas, gross profits are steadily going down since 2002. Question is What caused
revenues to go up substantially (over 11%) in 2001 and 2002 and why are GP going
down?

There could be a number of reasons for revenue jumps: better economy leading to higher
demands; new products; new markets; lower pricing; etc. Obviously we would have to
dig deep into their operations to really know what happened. We could go to their Annual
reports to further analyze. This will point to, hopefully, their strategy that would have
caused these jumps. After analyzing further we would find that Maytag had a strategy
of growth through acquisition.

Looking at GP numbers, we can point to a number of reasons for their poor performance:
lower pricing and/or higher discounts; inventory going up; low plant utilization; higher
labor costs; etc. Some or all of could lead to understanding strategy and execution
challenges. More later....

Now let us take another example, of Xerox, a company that has been going through a
transformation for quite a while. It faced a stiff competition from Japanese vendors
beginning in 1980s and lost its market leadership position.

You see that their revenues have been going down since 1999, from about $19B in 1999
to $15.7B in 2005. However, their bottom line is improving.

Again, we can ask questions that raised earlier: Why are revenues dropping, have they
divested certain businesses? Left some markets? Dropped some products? Etc.

On the net income side, questions to ask: are they better managing their resources? Or,
just cutting costs?

Since revenues are fairly flat since 2002 (after going down since 1999) and NI going up
in the same timeframe (after recording losses in 2000 and 2001) over a period of time, it
might suggest that there must be a Strategy and a Plan

When analyzing financial data as we have done above for Apple, Microsoft Maytag and
Xerox, we should convert income statements to Common Size statements. Common
size statements represent all line items in an income statement as % of revenue (as you
see in Xerox example above). Common size statements help us look at trends more easily.

Again, more later....

Next we take an American icon, Eastman Kodak. I am sure you have been reading a lot
about Kodaks problems for the past several years, and their bankruptcy filing last
January. As you can see from the chart below, their revenues have dropped from $12.5B
in 2002 to $7.2B 2010 (it went up in 2003 to 2005). The company has recorded losses
since 2005 and financials have been going through roller coaster ride. As you can see,
they have been shedding businesses and/or disposing assets to transition (?) to a specific
business focus (digital imaging technologies?).

Kodak was the first company to invent digital camera in 1975, but did not do much with
it until 1990s. By then, it was very late as many companies from technology fields
entered the market. In the 70s and 80s, Kodak attempted to diversified into chemicals,
medical and drugs businesses, only to divest later as they were faced with financial
problems and many management changes.

Several questions can be raised: is their strategy consistent with the environment? Is their
strategy too little, too late? Are they executing effectively? Do they have the appropriate
structure and staffing to execute? Etc. To answer these and many other questions, one
would need to go beyond this simple financial statement. For example, one has to look
into their gross profit ratios, very low for a manufacturing company.

While Kodak has been struggling, its main rival, Fuji Film has been very successful in its
strategy of diversification. Fuji applied its expertise in film (and chemical elements) to
enter into such markets as medical systems, life sciences systems, graphic, optical,
recording, etc., as well as stay in digital photography by making very tough decisions of
cutting drastically in film-based photography. Fujis CEO recently stated that when a
company loses its core business, some companies are able to adapt and overcome the
situation, while others are not. Fujifilm was able to overcome by diversifying.
Now let us take our final example: Fedex and UPS, both high performing and well
established fierce competitors.
So, to sum up:

In Apple and Microsoft Cases, one can argue the innovation and agility of Apple
Vs Microsofts inability to create new markets or unable to execute strategy

In Maytag case, Strategy Choice is considered the prime reason for their revenue
performance. They forgot Execution

And in case of Xerox and Kodak, both Strategy Choice and Execution remain
challenges as these companies face a very rapidly changing environment.

Strategy Choice means that a company has many options available; selection
depends on many factors (external and internal). Most often, companies do not
consider What not to do? as one of their options. Maytag decided to go for
growth through acquisition and failed because they really did not look at the
option of what not to do.
 Execution is the most neglected part of management process in many companies.
Execution means that while developing a strategy, companies must apply the test
of executability of their strategy: compatible culture? right organization? Right
leadership? right people? Proper resource allocation? Etc.

This course will focus on both Strategy Formulation and its Implementation

It has been a long introduction, but this subject matter requires that we start with real life,
and more current, examples to make a few points.

Syllabus and Course Requirements

You will find a detailed syllabus posted under this Course. The syllabus describes
course objectives and requirements. Make sure you have reviewed it carefully. Let us
highlights a few items:

Text Book: we will be using selected chapters from a text book by Thompson, et al,
Crafting and Executing Strategy. It provides examples to clarify/expand concepts and
management practices.

Class Notes, like the one you are reading, will provide extracts and additional views,
based on my teaching this subject since 2002, and my strategic planning experiences in
business world. These Notes will also contain Questions and Assignments. Where
appropriate, I have also uploaded PowerPoint slides complementing notes.

Case Studies: I have selected 3 key business case studies from Harvard Business School
Press and they substantially complement both text book and class notes. Details are given
in the syllabus. There is an additional Case on Scenario Planning, relevant to the Case on
UPS.

BSG business simulation: BSG is a simulation software that provides a decision

making experience in strategy and management. As a group, you will be making
decisions in different functional areas like R&D, Marketing, Manufacturing and finance.
You will be competing with other teams. There will be a weekly Round (of one year) and
will see results of your decisions. I will be providing you with more details later.

Your performance evaluation will be based on Assignments, Discussion Board Postings

(responding to specific questions), Group Projects and Final Report.

If you have any questions on the syllabus, please post on Discussion Board. I will
respond to these questions within 24 hours.

Overview of Strategy Process

Strategy has many definitions! One book lists some 66 definitions! We will be using this
definition in our discussion:

Strategy a determination of long-term goals and objectives of an enterprise, and

adoption of courses of action and allocation of resources, structured and
administered through organizations (Chandler, HBS 1962)

Strategy concepts and practices have been implemented and used by many large
corporations, including Apple, Microsoft, Kodak, Maytag, Best Buy, IBM, etc.
S&P index of 90 major US companies created in the 1920s.
- original list companies stayed on list for an average of 65 years.
- By 1998, the average anticipated tenure of a company on the expanded S&P 500
was 10 years.
- over the next quarter century no more than a third of today's major corporations
will survive in an economically important way.

So, why are these and so many others experiencing difficulties?

Traditional/Current view of strategy planning adopted by many large (as well mid size)
companies

Rational, top down, structured process

Conducting environmental scan/analysis
Establishing mission/goals
Choosing corporate, business and functional strategies
Implementing through changes in organizational structures and control systems

However, in many instances, this traditional view

Downplays existence on unintended consequences of actions

Ignores/downplays inherent unpredictability of environment

Is a tops down process and ignores the role of emergent strategy

The traditional process does not fully consider the Future. History is full of lessons on the
Future, for example:

I think there is a world market for maybe five computers

Watson, Chairman IBM 1943

Nobody wants to watch a box night after night

Zanuck, 20th Century Fox Chairman, 1949

There is no reason anyone would want a computer in their home

Olsen, Founder DEC, 1977
 We dont like their sound and guitar music is on the way out
The Decca Recording Company, rejecting Beatles 1962

Strategy Planning Concerns

A recent survey by McKinsey (July/August 2006) of Strategy and Financial executives
from large multinational corporations concluded that
- Only half satisfied with approach to planning strategy
- 75% have a SP process; <25% say its key to critical decisions
- CEO/senior executives drive decision making

- Key concerns:
- Strategy execution
- Communication
- Organizational alignment
- Performance measurement

There are many short comings of traditional strategy planning:

Too much structured, tops-down, rigid

Lacks organizational involvement, thus creates execution issues

Too quantitative and analytical

Does not recognize/accept fast changing World

Lacks employee empowerment

Focuses on Market share Vs Opportunity share

(i.e. create new competitive space through groundbreaking new products Vs
fighting for incremental slices of the same pie)
 Market Vs Opportunity
Share
To illustrate this last point, let us
take an example of Apples iPod.

First MP3 was introduced in 1987

and attracted several small
companies, who sold a few
thousands of units worldwide. A
combination of factors, including
Napstar case (illegal downloads)
and convergence of computer and
entertainment industries, attracted
Apple to introduce a whole new
experience, iPod and iTune, that
created a new industry definition, a new space for Apple.

Strategy planning requires a view of such external factors, mapping onto your own
internal capabilities and coming up with new game, new rules.

Tops Down Vs Bottom up Strategy

Another issue with the current strategy planning is the bottom up strategy emergence.
Mintzberg (1987) discussed a multi-dimensional view of strategy:
Intended strategy, which may remain unrealized

Deliberate strategy, where resources are invested in Intended strategy

Realized strategy, either intended or not

Unrealized strategy, intended but remains Unrealized

Emergent strategy which arises from the grass roots of organization

This chart shows how an intended strategy becomes unrealized and emergent strategy
becomes realized:

Impact of Environment
As you can see from above discussion, one of the components that is critical in Strategy
is Environment. There are several key Global trends that are taking place as you review
strategy and formulate a new one:

Inter-organizational networking
Accelerated product and process innovations
New technologies
Deregulations and liberalization
Globalization of product and financial markets
Higher consumer sophistication

First part of strategy is strategic thinking, resulting from strategic analysis (of external
and internal environments), which then leads to formulating strategies. Strategic
thinking is not enough, implementation of Strategy is critical. Implementation deals
at each level of the organization. It has been proven that Strategy Execution is the Key
to consistently superior performance.

Importance of Strategy Execution

Our Text Book starts with an example of AT&T, which is an indicative of how important
strategy execution is. To sum it up:

AT & T - 1984
New Consumer Products division
Strategic formulation, though challenging task, less concerning than Execution
 Culture
Incentives and reward system
Functional silos
Managing Change

Execution is a key to Success

Making Strategy work is more difficult

Why:
Managers are trained to plan, not execute
Not integrative
Silos
Grunts handle execution
Smart Vs Grunts
Pay systems
Ownership
Execution takes longer than Planning
Feedback system
Execution is a process and not an action or step

Planning and Execution Interdependency

Integration
This last point on Integration is important, to underscore the integrative aspect strategy.

Lacking this integration, a

company can have
difficulties as discussed in
case of Maytag.

Integration simply means that

a companys strategies be
tied to individual function
level strategies and more
importantly, functional level
strategies be tied to each
other, that is integrated.

To wrap up our Introduction, let us take a real life example of a strategy planning
process. The chart below shows a planning process of a large multinational company,
which you will find in many other companies. This process used year after year, had a
huge gap between strategy (which itself was not a good process) and execution. The
results were as expected, very dismal.

Over the next 10 weeks, we will be discussing strategy and execution a lot. For now, this
is enough to get you started.
Business Basics

Basics of the Business are simple:

1. What is your business? What is your mission? What is your vision?

2. Who is being satisfied? Industry? Markets? Customers?
3. What is being satisfied? What problems are you addressing?
4. How are you meeting your customers needs? Strategies? Products/services?

Management guru Peter Drucker has best described the business basics in his paper
called The Theory of the Business. According to him, you can break a business up in 3
components: Mission; Environment; and, Competencies. When a business is successful, it
has made correct assumptions about all of these components. A business gets into trouble
(like so many are today) when it fails to recognize (or ignores) changes in any of these
three components.
Mission/Vision

What is Mission? Mission is all about making a difference in lives of our customer. The
mission statement communicates the firm's core ideology and visionary goals,
generally consisting of the following three components:
1. Core values to which the firm is committed
2. Core purpose of the firm
3. Visionary goals the firm will pursue to fulfill its mission

The following are a few examples of values that some firms has chosen to be in their
core:
excellent customer service
pioneering technology
creativity
integrity
social responsibility

The core purpose is the reason that the firm exists. The core purpose is an idealistic
reason for being. Why

The visionary goals are the lofty objectives that the firm's management decides to
pursue. Most visionary goals fall into one of the following categories:

Target - quantitative or qualitative goals such as a sales target or Ford's goal to

"democratize the automobile.
 Common enemy - centered on overtaking a specific firm such as the 1950's goal
of Philip-Morris to displace RJR.

Role model - to become like another firm in a different industry or market. For
example, a cycling accessories firm might strive to become "the Nike of the
cycling industry.

Internal transformation - especially appropriate for very large corporations. For

example, GE set the goal of becoming number one or number two in every market
it serves.

Druckers second component deals with the Environment. It takes into account what
markets, customers, their future needs, present & future competition, etc. Again,
assumptions made about these factors constantly change and if the business does not
update their behavior (that is, model), it falls into difficult times. Drucker makes a good
analysis of IBM and GM to make this very important point.

Last component in Druckers The Theory of the Business is a businesss competencies, its
capabilities, strengths and weaknesses.

The Theory of the Business can be summed up as follows:

Assumptions about Environment, Mission and Core Competencies Must Fit

Reality

The assumptions in all Three Areas Have to Fit One

The Theory of the Business Must be Known and Understood Throughout the
Organization

The Theory of the Business has to be Tested Constantly

Another way to look at a business is

P (profit) = R (revenue) C (cost)

Again, this will sound very basic! Management forgets about

Where does Revenues come from? How are they being impacted by changes in
markets? Customers/ Competition? Etc.

What are different costs? How they being managed? Are costs in line with
strategies?
There is an excellent book written by a well known consultant, Ram Charan, What the
CEO Wants You to Know: How your Company Really Works. You can go to this
website and read an excerpt.

http://www.amazon.com/gp/sitbv3/reader/103-0769303-3786265?
asin=0609608398&pageID=S00J&checkSum=mGQQtGXmM9lIcPZ1t4K56uWTAnHW
g1I/6Yyedi7VdZ4=

In the next few sessions, we will discuss at length strategic analysis (i.e. environmental
factors, internal capabilities) which will enable an organization to consider what are the
different options available for future course of actions.

Text Book Chapter 1 Highlights

- Strategy is a management plan to take the company to where it wants to

(objective) in light its resources (competencies) and environment
(competition, customers, suppliers)
- It is all about creating and sustaining a competitive advantage
- There are generic strategies: cost-based advantage and differentiation- based
advantage. These generic strategies can be further described based on market
scope, broad or narrow
- You can find out a companys strategy reviewing its performance and actions.
A good starting point is their annual reports and SEC submissions like 10-K.
- As we started in our first week, you can look at a companys financials and
understand some of what the company is trying to do (grow organically, grow
through M&A, retrench/consolidate, etc.).
- Strategy is never static; it needs to be periodically reviewed and crafted based
on the environmental (external and internal) factors
- A companys strategy is a result of proactive actions (based on decisions from
strategic analysis) and reactive actions resulting from in anticipated events.
- Strategy must be crafted ensuring its executability. A good or winning strategy
must be executable (i.e. the company has right organization, right skills,
resources, leadership, etc.)
 - Strategy is future, and thus, it always based on certain level of risk (future is
always unpredictable). A managers challenge is to understand and manage
these risks.
- Strategy making is often described as an entrepreneurial exercise. In many
respects, it involves a risk taking attitude and it is a creativity process. Great
strategists have a keen eye to spot opportunities and also have a capacity to
choose among many options. Strategy making requires a continuous and
constant process so as to respond to
Changing market conditions
Changing customer needs
New technologies
New production methods
Competitors moves
Political/regulatory changes
Etc.

- A companys business model is one way to understand its strategy, that is how
it intends to make money. There are many different business models like
Razor-blade, advertising based, subscription based, service based, etc. We will
discuss these different models later in our class, but for now, do read pages 12
13 for some basic review.

Additional Points on Strategy

Following points further emphasize what is strategy and more importantly, what is NOT a
strategy:
- Operational effectiveness (achieved through outsourcing, reengineering,
benchmarking, etc.) is NOT strategy, they are necessary but not sufficient. They
are essentially managerial tools to enhance competitiveness and are tactical.
- Strategy is about establishing a strategic position.
 - Operational effectiveness provides a base line to a strategic position; a company
must go well beyond to truly create a more permanent advantage (like Apples
iPod; Southwest Airlines creating a new market: Budget Airlines, etc.).
- Constantly rediscovering or reinventing to ensure a unique competitive position
- Strategy is a set of UNIQUE activities and MUST tie them together. We will
cover this point in a more details as it is an important from the standpoint of
integration and coordination among all parts of a firm.
- Tradeoffs are very important: strategy is all about what to do and strategy is also
all about what not to do
- Strategy and Activities fit must be a dynamic one to protect a sustainable
competitive advantage. Constant upgrading of information technologies, for
example, is one companies are attempting to protect their advantages.
- Leadership is very important in making sure that the above is accomplished
- Strategic positioning should have a horizon of a decade or more, not of a single
planning cycle.

An Example: IBM

The following is extracted from IBMs Annual Report to illustrate how a company
describes its Mission/Vision and strategies at different levels:

Mission/Vision
At IBM, we strive to lead in the invention, development and manufacture of the
industry's most advanced information technologies, including computer systems,
software, storage systems and microelectronics.

We translate these advanced technologies into value for our customers through our
professional solutions, services and consulting businesses worldwide.

IBMs strategy is
- to pursue an innovation agenda with its clients, partners and in other relationships,
- to continue refining its portfolio to achieve higher value.

Through its understanding of where technology, client requirements and global business
are headed, the company continually makes strategic decisions to maintain its
leadership of this rapidly changing business by focusing on high-value innovation-based
solutions and services while consistently generating high returns on invested capital for
its shareholders.

The company utilizes its entire portfolio hardware, software, services, technology
and research to maintain its leadership.

IBMs strategic priorities for 2006 include (from Annual Report 2006):
Capitalizing on technological, business and social trends and the need of enterprises to
innovate in addressing those trends;

Maintaining market-share leadership in systems, middleware software and services, as a

platform to drive growth;

Focusing investment and resources on emerging growth areas, including Business

Performance Transformation Services and emerging countries;

Continuing the global integration of IBM, driving productivity gains and higher value in
service delivery;

Furthering IBMs leadership in innovation initiatives, including advanced semiconductor

design and development, collaborative intellectual capital, business process expertise and
integration, and advanced systems for supercomputing capability including
mainframes and grid networks;

Acquiring businesses that contribute strategically to its portfolio, and exiting businesses
that no longer support its strategy for innovation and higher value.

Back to your Assignment .