Lecture 1: Introduction to strategy

Defining Questions of Strategic Management

- Why is Tesla so successful? In contrast to Tesla’s success, the big three U.S.
automakers— Ford, GM, and Chrysler (now Stellantis)—struggled during the first
decade of the 21st century, with both GM and Chrysler filing for bankruptcy
protection.
- Why are some companies successful while others fail? And what, as a strategic
leader, can you do about it?

1.1 Strategic Management

- Strategic management is the integrative management field that combines analysis,
formulation, and implementation in the quest for competitive advantage.
- Mastery of strategic management enables you to:
- view a firm or a nonprofit organization in its entirety.
- think like a general manager to help your organization achieve superior
performance.

Strategy
- Definition: The set of goal-directed and integrated actions a firm takes to gain and
sustain superior performance relative to competitors.
o Strategy is the outcome of the strategic management process.
- To achieve superior performance, companies compete for resources:
o New ventures compete for financial and human capital.
o Existing companies compete for profitable growth.
o Charities compete for donations.
o Universities compete for the best students and professors.
o Sports teams compete for championships.
o Celebrities compete for endorsements.
o Example: Tesla, a new entrant in the automotive industry, is competing for
customers with established U.S. companies such as GM and Ford, and
with foreign automakers Toyota, Honda, Nissan, Hyundai, VW, Audi,
Porsche, Mercedes, and BMW, among others.

A Good Strategy Is Based on Three Elements

1. A diagnosis to identify the competitive challenge.
a. Diagnosis includes analyzing the firm’s external and internal environments.
b. Analysis.
2. A guiding policy to address the competitive challenge through strategy formulation.
a. The guiding policy lays the foundation to craft a firm’s corporate, business,
and functional strategies.
b. Formulation.
3. A set of coherent actions to implement the firm’s guiding policy.
a. Implementation.
Crafting a Good Strategy at Tesla
1. DIAGNOSIS OF THE COMPETITIVE CHALLENGE.
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 hard to set a new standard in automotive technology. He hopes that zero-emission
electric vehicles will one day replace gasoline-powered cars.
Tesla’s competitive challenge is sizable. To succeed, it must use its new technology to
manufacture attractive and affordable vehicles, which will compete with cars running on
gasoline. To overcome “range anxiety,” Tesla has installed a charging station network. At this
point, mass-market EVs cannot drive as far on one charge as gasoline-powered cars with a
tank of gas. Gas stations are pretty much on every corner in cities and every couple of miles
on highways.
2. A GUIDING POLICY
Tesla’s guiding policy is to build cost-competitive mass-market vehicles such as Models 3/Y.
Its formulated strategy is consistent with its mission and the competitive challenge identified.
This strategy required significant strategic commitments, as demonstrated by Tesla’s $5
billion investment in a new lithium-ion battery plant in Nevada, the so-called Gigafactory or
Giga Nevada. Batteries are the most critical component of electric vehicles. To build the
battery manufacturing component of the Gigafactory, Tesla partnered with Panasonic of
Japan, a world leader in battery technology.
To expand global production capacity rapidly and drive down costs, Tesla invested billions in
several electric vehicle manufacturing plants across the globe. In 2019, it completed a
production facility in Shanghai, China. Giga Shanghai is a vast factory, equal in size to the
Tesla car manufacturing facility in Fremont, California, combined with its Gigafactory in
Nevada. The goal is to produce batteries and cars on a large scale and in the same location.
Large scale and co-location of critical tasks allow Tesla to further lower the price of Models
3/Y. The completion of Giga Shanghai in a record time of less than one year was a turning
point for Tesla because the company was facing bankruptcy in 2018. The development and
manufacturing costs of the luxury Models S/X were much higher than anticipated, leading to
huge losses.
3. COHRENT ACTIONS
To make a cost-competitive mass-market vehicle, Tesla must benefit from economies of
scale, decreasing the cost per vehicle as output increases. To reap critical cost reductions,
Tesla must ramp up its production volume. 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, exemplify
actions coherent with Tesla’s formulated strategy. So do its investments in Gigafactories in
Austin, Berlin, and Shanghai.
Another set of coherent actions are those focused on Tesla’s best-selling vehicles, Models
3/Y. In 2021, the EV maker doubled its production volume to close to 1 million cars
compared to 2020. Thus, since 2015, Tesla has achieved a 20-fold increase in production
volume from 50,000 cars built per year. Tesla’s focus on Models 3/Y explains why they made
up 97% of Tesla’s vehicle deliveries in 2021. In addition, to ramp up production and drive
down costs even further, Elon Musk announced, in 2022, that Tesla will not introduce any
new vehicles for the time being. Moreover, he pushed back the mass production date for the
much-anticipated Cybertruck to 2023.
At the same time, Tesla is expanding its network of charging stations across North America,
Europe, and Asia. To fund this initiative and to avoid bottlenecks, Tesla announced that it will
no longer provide new owners free use of the company’s charging network. In addition, to
accomplish the lofty goal of making zero-emission electric motors rather than internal
combustion engines the new standard in automotive technology, Tesla decided to make some
of its proprietary technology available to the public. Musk hopes that sharing Tesla’s patents
will expand the overall market size for electric vehicles as other manufacturers use Tesla’s
technology. This set of coherent actions shows that Tesla is dedicated to achieving its mission
of accelerating the transition to sustainable transportation.

Competitive Advantage
- A firm with superior performance relative to competitors in the same industry or
the industry average has a competitive advantage.
o Competitive advantage is always relative, not absolute.
- To assess competitive advantage, we compare firm performance to a benchmark—
o either the performance of other firms in the same industry.
o or an industry average.

Sustainable Competitive Advantage

- A firm that can outperform its competitors or the industry average over a
prolonged period has a sustainable competitive advantage.
- Apple, for example, has enjoyed a sustainable competitive advantage over
Samsung in the smartphone industry since introducing the iPhone in 2007.
o Brands with smaller market share include HTC (Google Pixel phones),
LG, and Motorola/Lenovo.
o Other phone makers, such as Microsoft (which purchased Nokia) and
BlackBerry, have exited the smartphone market, while new entrants such
as Oppo, Xiaomi, and ZTE of China are gaining traction.

Competitive Disadvantage & Competitive Parity

- If a firm underperforms its rivals or the industry average, it has a competitive
disadvantage.
- For example, a 15% return on invested capital may sound like superior firm
performance.
o In the consulting industry, though, where the average return on invested
capital is often above 20%, such a return puts a firm at a competitive
disadvantage.
o In contrast, if a firm’s return on invested capital is 2% in a declining
industry such as newspaper publishing, where the industry average has
 been –5% for the past few years, then the firm has a competitive
advantage.
- When two or more firms perform at the same level, they have competitive parity.

How to Gain a Competitive Advantage

- Two distinct strategies form the basis for competitive advantage:
o A firm provides goods or services that consumers value more than its
competitors’ offerings, but at a similar cost (a differentiation strategy).
o the firm furnishes goods and services similar to those of competitors but at
a lower cost (a cost leadership strategy).
- The rewards of superior value creation and capture are higher profitability and
increased market share.

Strategic Positioning
- The critical point: a good strategy delivers superior value while managing the
costs of creating it or by offering similar value at a lower cost.
- Strategic positioning: Managers stake out a unique position that allows the firm to
provide value to customers while controlling costs.
- The larger the difference between value creation and cost, the greater the firm’s
economic contribution and the greater the likelihood of gaining a competitive
advantage.

Strategic Positioning Requires Trade-Offs

- Managers must make conscious trade-offs.
o How to allocate resources?
o Which activities to pursue?

What Strategy Is Not

1. Grandiose Statements Are Not Strategy.
You may hear leaders say, “Our strategy is to win” or “We will be No. 1.” Twitter, for
example, declared its “ambition is to have the largest audience in the world.” These
statements of desire, on their own, are not strategies. They provide little managerial guidance
and often lead to goal conflict and confusion. Moreover, this type of wishful thinking
frequently fails to address the economic fundamentals of value creation and cost. A
compelling vision and mission can lay the foundation for crafting a good strategy; however,
strategic actions and commitments based on economic fundamentals must address the
competitive challenge identified.
2. A Failure to Face a Competitive Challenge Is Not Strategy.
If a firm’s leaders do not define a clear competitive challenge, employees have no way of
assessing whether they are making progress in addressing it. For example, strategic leaders at
the now-defunct video rental chain Blockbuster failed to address the competitive challenges
posed by new players, including Netflix and Redbox. Likewise, Blackberry RIM did not
address the competitive challenge posed by Apple’s iPhone. Microsoft initially failed to
address the shift to mobile computing pioneered by Google’s Android and Apple’s iOS.
3. Operational Effectiveness, Competitive Benchmarking, and Other Tactical Tools
Are Not Strategy.
People casually refer to a host of different policies and initiatives as “strategy”: pricing
strategy, internet strategy, alliance strategy, operations strategy, AI strategy, brand strategy,
marketing strategy, HR strategy, China strategy, Covid-19 strategy, and so on. These elements
may be a necessary part of a firm’s functional and global initiatives to support its competitive
strategy. However, they are not sufficient to achieve a competitive advantage. We reserve the
term strategy for describing the firm’s overall efforts to gain and sustain a competitive
advantage.

1.2 Value Creation

- Value creation occurs because companies with a good strategy can provide
products or services to consumers at a price point that they can afford while
keeping costs under control, thus making a profit at the same time.
- Thus value creation lays the foundation for the societal benefits that successful
economies can provide:
o education, infrastructure, public safety, health care, clean water, and clean
air, among others.

Stakeholders
- Stakeholders are organizations, groups, and individuals that can affect or be
affected by a firm’s actions.
o They have a vested claim or interest in the firm’s performance and
continued survival.
- Stakeholders make specific contributions to a firm, providing different types of
benefits to various stakeholders:
o Shareholders provide capital with the expectation that they will receive a
return on their investment in stock appreciation and dividend payments.
o Creditors such as debt holders provide financing for the firm.
 o Employees contribute their time and talents to the firm, receiving wages
and salaries in exchange.
o Communities furnish real estate, infrastructure, and public safety.
- Internal stakeholders include employees (executives, managers, and workers),
stockholders, and board members.
- External stakeholders include customers, suppliers, alliance partners, creditors,
unions, communities, governments at various levels, and the media.

Stakeholder Strategy
- An approach to strategy formulation that considers all of the company’s
stakeholders, not just its shareholders.
o A core tenet of stakeholder strategy is that a single-minded focus on
shareholders exposes a firm to undue risks.
- Strategy scholars have provided several arguments as to why effective stakeholder
management can increase firm performance:
o Satisfied stakeholders are more cooperative and thus more likely to reveal
information that can further increase the firm’s value creation or lower its
costs.
o Increased trust lowers the costs of firms’ business transactions.
o Effective management of the complex web of stakeholders can lead to
greater organizational adaptability and flexibility.
o The likelihood of adverse outcomes can be reduced, creating more
predictable and stable returns.
o Firms can build strong reputations that are rewarded by business partners,
employees, and customers.
A Decision Tool for Stakeholder Strategy
- Stakeholder impact analysis provides a decision tool that helps strategic leaders
recognize, prioritize, and address the needs of different stakeholders.
 o It helps the firm achieve a competitive advantage while being a good
corporate citizen.
- Three crucial stakeholder attributes: power, legitimacy, and urgency.
o A stakeholder has power over a company when it can get the firm to do
something that it would not otherwise do.
o When a stakeholder’s claim is perceived as legally valid or otherwise
appropriate, that stakeholder has a legitimate claim.
o A stakeholder has an urgent claim when it requires a company’s immediate
attention and response.

Stakeholder Impact Analysis

The Pyramid of Corporate Social Responsibility

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