 This class will be the first session in which we are going to spend some time in understanding a very important concept called strategy and we will be spending more time in understanding what strategy is, the need for strategy, the various models that different organizations adopt to strategize and ensure that these organizations are able to sustain in the business ecosystem. Now before I get into the real technicalities of this managerial concept of strategy we must first understand that the business ecosystem outside is very vibrant and dynamic and just as this slide shows you that there is always a constant need to redefine our approach to everything be it business, be it our own personal life or whatever be the context in which we are situated there is always a constant need to redefine and this also means that there are occasions where we should also include our approach to redefining itself as a result of which we should realize that the need to redefine our approach to everything includes our approach to redefining itself. Now this I thought will first become a good background when I am going to introduce this concept of strategy the reason being everybody knows all managers know that organizations need strategy but then there is no uniform understanding of the concept of strategy. So if you ask managers across different industries across different countries you should be surprised if you get different understandings of the very word strategy which means there is a need to redefine and to see whether there is a common understanding of the concept of strategy before we spend some time on developing strategic models. So only when we have this basic understanding of this concept of strategy will be able to move forward. Now let me just begin with a textbook definition of what strategy is it is a concept that sets the direction and scope of a business organization not just for a short term purpose but for a long term purpose of course there are short term strategies but let us assume that at a very broad level we are talking about a long term purpose and in the process we need to develop something that gives the organization a sustainable competitive advantage and this it should be able to do by integrating all the activities and resources that it has at its disposal within a business environment that is as challenging as it is it will be in the future and at the end of the day by doing all of this it should meet the expectations of all the stakeholders. So this is broadly the definition of a textbook definition of strategy you know businesses especially businesses that are engaging in fierce competition by and large excluding the businesses not for profit they exist to add value to the shareholder and this is a general management terminology that you often would hear that the purpose of business is to maximize shareholder value it means that there should be every effort to maximize profitability so the bottom line is the return on investment so managers in the middle the leadership they always look at how businesses can maximize profit and especially when the industry is very mature growth is static at times managers would feel that at this business cross road we are just meeting the end of the road there will be some industries where there is a lot of potential to grow and the best of those in the business would have a lot of strategic value that would make them leaders and there might be some industries where it is best to be silent and then to follow to create some value in the industry so whatever stage and in whatever position a business organization is looking at it from the business crossroads to lead to follow to even exit out because we have reached an end for all of these we need to understand what strategy is and to do all of this we need to have a strategy in place more often than not there is a lot of confusion between operational effectiveness and strategy I began the class by saying that there is change that is happening in the business ecosystem and the market changes so rapidly that to remain in the same place we will have companies and businesses have to respond very quickly so there is a pressure on companies to respond to such market changes and these responses have come in different forms and the ones that are popular are these management tools that have been good response mechanisms for example you would have heard the terminology total quality management or TQM or outsourcing or benchmarking business process reengineering BPR so all these management tools are good response measures to those changes that happen very dynamically in the industry now it should not be mistaken to be strategies I will explain on this a little later but then the very fundamental question that we need to ask ourselves is are these management tools strategic or are these for operational effectiveness my view is according to Michael Porter is that these management tools are for operational effectiveness and not strategic in nature but at the same time it is not that operational effectiveness is not necessary it is necessary but the argument is that it is not correct to assume that it is sufficient and understood as or rather misunderstood as strategy while operational effectiveness is also necessary we need to understand that strategies also equally important so both are essential and both work in different ways so it is very important to understand that strategy is different from operational effectiveness now expanding further on operational effectiveness we have seen that operational effectiveness is a result of some generic solutions that emerge or because there is a great need to provide such solutions due to changes that happen in the business in the markets themselves for example outsourcing the IT industry in India one of the biggest one of the finest examples for how success how successful IT services industry in the country was built because of the concept of offshore product development software development this concept of outsourcing emerged and few companies were able to leverage on this and then the rate at which this was diffusing we saw more and more companies entering into the IT services industry as a result of which more businesses get into an industry which at the very first place let us assume that was profitable because the the first movers were able to sustain a profitability because they were able to put in place certain management tools that gave them operational effectiveness but remember this operational effectiveness is not something unique to a particular business and this is something that could be easily replicable as a result of which this just gets diffused fast now when more and more businesses do this will a company in a particular industry be able to sustain a unique value that it had when the industry was at its nascent stages this is a very important question for which we will be able to find answers as we move if the management tools or the practices of the business that is for example take the commercial printing industry because of the changing dynamics in the industry itself if companies resort to cutting crew sizes getting some of the best machinery increasing the performance time now these are all tools that can be employed to increase the effectiveness and this is all pervasive now when we do such things the gains also need not necessarily be captured only by the businesses themselves the gains could probably be captured by the customers could be by the suppliers as a result of which the inherent profitability of the industry is not improved and a classic example is the commercial printing industry where the the net profit margin used to be 10% and more and more of because of this operational effectiveness where crew sizes were reduced best of the machinery was imported for the printing industry a lot of thing added value to the customer or to the supplier and as a result of which the profitability reduced to around 3 to 4% from 8% now does it mean that operational effectiveness necessarily means superior profitability no and operational effectiveness does it retain uniqueness to businesses no because it is easily replicable as a result of which there is competitive convergence because the more and more other businesses would like to replicate the same management tools the more and more companies would start looking alike within the same industry and the problem is when managers misunderstand operational effectiveness as strategy now let us there is a very distinct line that distinguishes operational effectiveness with strategy now operational effectiveness simply means that you perform the same set of activities better than your rivals let us for example take the Japanese automobile industry they were the ones who pioneered the inventory control the TQM the lean management as a result of which they were able to offer low cost and high quality assume Toyota started this quickly Honda was able to do this the entire automobile industry was able to do this as a result of which there was a constant improvement amongst those businesses within the same industry as a result of which there was continuous improvement in the operational effectiveness of each of these businesses but was this enough for sustained success that is the key question this is not enough for sustained success because such practices gets rapidly diffused and the Japanese car manufacturing industry is a classic example because each of them were able to bring out absolute improvement in their operational effectiveness but then the relative improvement for the industry the relative improvement to each of them was missing there was no there was absolute improvement in the effectiveness but relative improvement for none the understanding is that such management tools are increases operational effectiveness will only result in one company being able to perform similar activities better than rivals and this could happen for a very brief period of time because such activities are diffused at a faster rate and as a result of which do not continue to become unique and as a result of which the industry itself will start to imitate such activities and all of them would be at par then how was then how do companies differentiate and emerge from this crowd so that they distinctly stand out now that is when we have to talk about strategy now that fine line of difference between strategy and OE is while operational effectiveness is performing the similar activities better than rivals strategy is about performing similar activities in a different way altogether or even performing different activities now what is the benefit of doing this the benefit of doing the same set of activities in a different way is that when you do this you can preserve the uniqueness with which you do you do these activities if you think that these are not easily replicable and ensure that it is not all pervasive now what is the benefit of this this would give you superior profitability by either giving you great value the business gives great value which means there is a premium that you can charge on the customer because more value means more price or for comparable values if you are able to deliver it at lower cost and reduce the average unit price and still there is superior profitability and how do you do this not by doing the same activities differently better than the rivals but then you perform a different activity itself then you are able to actually create some unique advantage now this way since it is not easily imitable by competition this does not create mutual destruction within the industry the reason is competitive strategy is about creating certain choice of different set of activities that businesses engage and these set of activities deliberately chosen by the business to ensure that maximum value is delivered or the comparable value is delivered at lower cost let us take the example of south-west airlines to understand this better now south-west airlines is known for its low cost short haul point to point non-busy airport no meal self-ticketing so various experiences characterizes south-west airlines now what sets south-west airlines apart from the others in the airline industry south-west airlines chose to perform the same set of flying activities but then it chose to do it a little differently if you ask who the customers for south-west airlines is is actually it is attracting the surface transport customers who otherwise would have taken a car or a bus or frequent flyers who prefer convenience then the full service that other airlines companies offer now let us understand this better let us compare south-west airlines with a full service airlines and understand the value proposition that south-west airlines gives a full service airlines is fly from any point A to any point B and this is possible only if you have a hub and spoke arrangement with major airports and then you need to have partner airlines taking you from point A to C then to reach B provide business class services and long haul flights which means meals baggage transfer but this is also an airline business and this is also a set of activities and south-west airlines is also in the airlines business but then decided to do this business by engaging in a different set of activities where it said that it is just going to be point to point no hub and spoke and it ensured that it is the turnaround time of the aircraft at its gates was very fast not more than 15 minutes as a result of which it was able to clock long flying hours with lesser aircrafts no assigned seating and since it is point to point no interline baggage checking it removed travel agents automated ticketing so what is the value proposition that south-west airlines was delivering it was delivering convenience and it was also able to do it at low cost because it removed a lot of other activities that consumed cost now a full service airlines cannot offer the value proposition of south-west and continue to be a full service airlines it is not possible a full service airlines cannot offer this value proposition on south-west routes as a result of which it became very successful in whichever route whichever point to point route that south-west airlines started to provide services another example is the IKEA which is another big Swedish furniture giant let us compare contrast this with a typical furniture store you entered into a furniture store it is a showroom where you have some select samples for display and those that are not available for display are available in some product brochures in some designer books and you have some sales person assisting you you will be taken through all those samples and after discussions you your order gets relate to a third party manufacturer and then after the manufacturing is over it gets delivered after some time and of course there is value in this the value is there is maximum customization because you get furniture design the way in which you want and also service through all these customer sales force personnel inside the showroom then delivery happening at your doorstep but all of this at a higher cost now IKEA strategic position is a little different it delivers stylish furniture at low cost through a set of activities that it performs remember both of them are in the furniture business but the IKEA set of activities it is a little different from what its competitors do the IKEA stores is more on a self-service mode so there is no sales person it will be IKEA's own design so no third party engaged in manufacturing so I get into an IKEA store all of the IKEA design products are available and these are designed in low cost modular type and very easy to assemble by the customer himself by me if I get into an IKEA store I want to buy let us say a cupboard I I I know what design I want then I know that these are the different modular pieces and these could be assembled by myself and then a cupboard is ready and since all the products are displayed in the huge stores and some even in some room like settings so that also dismisses the need for a designer to come and suggest how this would look in a room so in such room like settings you have all the products displayed and they also have warehouses adjacent to showrooms so once you know that this is the product that you want you just pick it up and deliver the delivery is done by ourselves so we just take it in our own cars and even IKEA provides some car roof racks which you can return when you come to the store next time now what is the value proposition here the value proposition is that I do all this myself there is no need for a decorator no third party engaged in manufacturing and most of the IKEA stores work extended hours basically this is actually targeted towards the young urban professionals so when they come after work they come late some of the IKEA stores in fact most of the IKEA stores have installed childcare so that they leave the children to play around while the young urban professionals do the shopping there is also value in the way in which IKEA does business in the furniture industry and this is also able to reduce a lot of cost now if you look at the examples of Southwest or IKEA and many other examples that are readily available we should understand that every business needs to create a strategic position for itself which emerges from three overlapping but distinct sources some businesses can decide to serve few needs of many customers like let us say the auto lubricant providers they do not provide automobile repair or maintenance service they just provide lubricants or some businesses provide broad needs of few customers example is investment solutions for high network individuals where the entire suite of financial products and services are available for such customers or some businesses serve broad needs of many customers in a narrow market a semi solutions or the online aggregators like Amazon or eBay they provide a host of services for again a wider base of customers now we must understand that when we decide to do certain set of activities different from the rivals or different activities itself then definitely we need to make some trade offs because traders of trade offs are unavoidable because we are trying to create a differentiated segment in which we want to operate so you do not find a branded retail shop also trying to also position itself as a multi brand retail shop because at the strategic level it decided that it is going to be just a branded retail output it is very dangerous to straddle meaning you try to retain your existing position and also try to imitate your rival successful position especially when the rival successful position is something very unique and different and this continental airlines tried to do when it is actually trying to imitate the low cost point to point model of south west airlines and also the same time trying to retain its original positioning of being a full service airlines that is why continental light was a failure another example of how Neutrogena made a trade off Neutrogena soap it positioned itself more as a medicated soap not as a deodorant or a skin softener and that is why you find Neutrogena more in drug stores than in the regular stores where other soaps are available so when you are trying to do something unique when you are trying to do activities which are different from your rivals are doing different set of activities themselves you are bound to make certain trade offs otherwise it would create an inconsistency in the image that you are trying to build because you cannot have a dual identity to the business that you are doing some images already formed if you are trying to do a particular set of activities this way as a result of which you cannot try to do a different set of activities so that might it might result in in in your image not being properly communicated and if you are not making this trade off it will be the same personnel will be the same equipment it will be the same systems in place but trying to do the activities differently which will result in losing certain uniqueness that the business has because different activities the way in which different activities are done require different management systems different types of people different attitude different skills different machinery as a result of which you need to just make a trade off and say I am just going to do only this set of activities in this particular way and from an internal control point of view if the leadership is very clear that it is going to make this trade off and it is going to do only these set of activities then that is get that is easily percolated right up to the last employee now that is why sustainable strategy requires trade offs and another way to distinguish between operational effectiveness and strategy is to understand the benefit of coherence energy now operational effectiveness is achieving excellence in individual activities while strategy is trying to see how we can integrate the activities to form coherence energy again you take the southwest example the various factors have made southwest a successful low cost airline of the question is what is the key success factor then the answer is very simple you know everything really matters for southwest the reason is the competitive advantage that southwest airlines get comes from the very fact that it is able to reinforce each of these activities and each of these activities are intertwined which means there is a strategic fit amongst these activities and that fit is the key for the success of southwest so we need to understand when businesses have a lot of activities there should be an integration of these activities so that there is some coherence energy that emerges out of this and this is what we call as strategic fit now when a business is a chain of such activities and each of them may or may not be a source of value but the benefit of having an activity fit is that it clearly locks out imitation the reason because it creates a chain in which the chain is as strong as the strongest link it is very difficult to duplicate a southwest model or a neutral genus soap model by competition because this fit the strategic fit ensures a lot of synergy which is very difficult to duplicate and also when there is a strong fit amongst all activities if one activity performs very poorly it clearly gets exposed as a result of which there is betterment the way in which these activities are linked the reason that we need to have a strategic fit is not only because it gives a competitive advantage because each of these now why does it give a competitive advantage because each of the activities are able to reinforce a different set of activities take the case of southwest airlines because the ground crew is efficient we are able to make the turnaround time fast and because of that flying hours is more and because of that the flying productivity is more because of that your bottom line is improving no seating arrangements the cabin crew is so efficient as a result of which again the customer experience itself is unique so you have a host of such activities which reinforce amongst themselves to provide that competitive advantage and it is sustainable because it is very difficult to imitate the activity of competition now the probability that competition can match any activity is always less than one if I am able to do this do a particular activity so well the probability that somebody else will also do it so well is less than one now if there is a strategic fit amongst all these activities then that ensures that the probability of imitating the entire activity chain is decreased the reason is the probability gets compounded the probability to imitate one activity is 0.9 to imitate two activities is 0.81 to imitate four is 0.6 and so on so you can understand the more and more the activity system has a third or a fourth or a third or a fifth order fit the more and more is the competitive advantage sustainable because it is very very difficult to duplicate an activity fit now we put all this together and then ask this question what is strategy then the answer is very simple is that it is a process that creates a unique and valuable position which involves a set of activities that are carried out differently to create sustainable competitive advantage now while we should understand that strategy is different from operational effectiveness it is very very important for you to understand that because today aspirations are mistaken as strategies experiments are mistaken as strategies mergers and acquisitions are mistaken as strategies if I decide to put in place an ERP system that is mistaken to be a strategy total quality management is mistaken to be a strategy well these are all individual set of management tools with improves the effectiveness of an organization these are not strategies at all so more than understanding what strategy is to me strategy is just one piece that is why I do not believe in saying that there is a marketing strategy there is a HR strategy there is an IT strategy there can never be different different strategies for a single organization that can be only one strategy and I have already told you that I am a great fan of Michael Porter and before we even understand fully understand what strategy is we should also understand what is not strategy that is also very very important because invariably managers have different understandings of the very word strategy and many many of these understandings are wrong because most often they confuse strategy drivers and strategy elements with strategy now what are these strategy drivers it could be the corporate culture of an organization it could be the leadership and the strategic planning that the organization has the way in which the organization analyze analyzes businesses internal and external the evaluation of a business and the how of strategy is often mistaken as strategy per say now let us just begin to let us let us just understand each of these strategy drivers and then I will also give you a short video on so that you understand what is not strategy I have seen so many managers misunderstanding corporate culture as strategy the corporate culture is just a set of beliefs and values that people share people within an organization share the way in which they behave with each other the way in which they behave with their customer clients or any stock stakeholders that is corporate culture and if somebody ask a strategy for a particular organization I have heard people saying that the strategy of this organization is to have a corporate culture of this type while it has got nothing to do with strategy per say and some even say the vision statement and vision statement which is an integral part of the corporate culture is strategy itself for example I have seen people saying the credo of Johnson and Johnson as its strategy well it is actually not corporate culture is just characteristics that get reflected in the attitude and behavior of the leadership the employees in an organization at times you find also the corporate culture reflected in the logos and at times people also get mistaken to interpret they even interpret corporate logos and say from these corporate logos I can make out what the strategy of the firm is I will just leave these logos with you so that you ask this question yourself what corporate culture do you think the following businesses have managed to develop and is it right to just translate this corporate culture as strategy per say the second important strategy element is the strategic leadership itself which involves in setting the future agenda in place built around certain strategic themes that answers three fundamental questions what does the business do for whom it does that business for and how the businesses excel so strategic leadership followed by strategic planning is also an integral strategic driver another important strategy element is the analysis part we need to analyze things that are happening within the organization and things that are happening outside the organization growth of India and China as manufacturing centers this is an issue that needs to be analyzed the changing demographic profile of the society the age structure of the population the political and regulatory climate which affects businesses so a lot of are the effect of let us say technology in the business so lot of things happen both inside and outside the organization which needs detailed analysis for which we need to know that there are different models available for such analysis internal being SWAT some of them internal some of them external best external portals diamond portals five forces external internal then you have value chain analysis BCG matrix balance code card so these are all various tools that we would be using for analysis and evaluation is also key to build a strategy we need to get some good dashboard analytics that provides data on sales profitability process efficiency and also other external data that we collect to get information on the various environmental and geopolitical parameters and this evaluation is very necessary and when we use all these strategic drivers and elements all this is done to create two main strategic outputs and this is the sum and substance that defines strategy by integrating all those activities two things must clearly emerge there must be a competitive advantage which gives the organization some uniqueness that is very difficult for competition to imitate or comparable value can be delivered at a lower cost so unique value which means there is room for charging more because it is the value is unique the value proposition is very unique or comparable value that can be delivered at low cost so these two are the main strategy outputs and if you are able to do one of these are both and if the purpose of this business is to do one of these are both then that is the strategy of the business and both have to be long term sustainable and they can do it in different ways see the confusion happens is the way in which we do this is often misunderstood as strategy that is why you would say you would see managers saying that you know acquisitions mergers and takeovers is going to be my strategy but that is not the strategy it is how we do this to achieve the unique proposition value proposition which is our strategy at the first place so I could do it either by market dominance which could be through an internal growth or acquisitions or through new product developments or through expansions or contractions are even coming out of businesses or become a price leader or go global like Microsoft or do some re-engineering and change the way in which just think out of the box and change the way in which I could do the same set of activities differently and leverage the organizations performance by doing that or the simple case of downsizing delaying restructuring now all these are the different ways in which we try to implement the strategic objectives. Now this should not be mistaken as strategy per se so if somebody says that the strategy of my firm is remaining flat my organization structure is flat and that is the strategy of the firm that is not strategy at all that is more a decision making process of a business that provides some efficiency in the decision making and that cannot become strategy because such processes are easily replicable by businesses or competition outside. Then what is strategy I would like to just conclude with this definition it is the way in which you create value by integrating a set of activities and performing them in a different way to gain a competitive advantage that is sustainable over a long period of time and if you are able to do that then you have a good strategy in place. So I will leave also some more reading material so that you will understand the concept of strategy better. Thank you.